The stress in the non-banking financial space has aggravated so much that the Reserve Bank of India (RBI), in its financial stability report, acknowledged that "failure of the bigger NBFCs can cause losses comparable to those caused by the big banks".
After back-to-back defaults by NBFCs and housing finance companies (HFCs) such as Dewan Housing Finance and Reliance Home Finance, and the resultant drop in their credit ratings, funding and growth have become a challenge for the sector.
However, there are NBFCs that have bucked the trend. Shubham Housing Development Finance Company is one such company that has not only averted the liquidity crisis but has also seen its loan portfolio growing, resulting in an upgrade in its ratings.
Sanjay Chaturvedi, co-founder and chief executive officer explains how Shubham Housing has managed to steer clear of the ongoing crisis.
"Broadly, there are two things that have caused troubles in the sector: NBFCs have taken short-term loans for long-term lending and there are NBFCs that have a large exposure to builders. Unfortunately, builders have not been able to sell their inventory, thus they are unable to service their debt," says Chaturvedi.
Shubham Housing Development Finance Company stayed away from both causes. "We have not done short-term borrowings at all. We take term loans from private and PSU banks and also from some developmental institutions such as NHB. So, we don't have short-term loan obligations," says Chaturvedi.
Besides, Chaturvedi says, Shubham Housing only lends to consumers. "The fact that we don't extend loans to builders, ratings agencies and lenders know that we are insulated from the crisis. The only impact that we face is in terms of cost of funds going up," he says. Cost of funds went up by 25-50 basis points for the HFC.
Rating agencies ICRA and Crisil have upgraded the rating of the company from BBB+ to A- in February this year.
ICRA, however, attributed the rating upgrade to 'the expected improvement in the company's capitalisation profile after its tie-up of equity of Rs 235-crore by Premji Invest picking up 44 per cent stake in the company. The rating upgrade also factored in the significant improvement in credit appraisal norms and processes and improved IT systems.
With Premji Invest picking up 44 per cent stakes in the company last year, now Chaturvedi along with Wholetime Director Rupa Basu hold slightly more than 9 per cent stakes. The rest is with Helion Ventures Partner, Elevar Equity and Motilal Oswal Equity.
Chaturvedi says that the HFC grew steadily until 2015-16, followed by a consolidation in growth. During the consolidation phase, they made a whole lot of changes from hiring new people, changing technology to more investments in technology for analytics.
Now is the time to scale up, says Chaturvedi. "This year we aspire to grow rapidly. We are looking at a CAGR of 50 per cent over the next three years. In FY19, we disbursed around Rs 650 crore. This year, our target is to reach Rs 1,000 crore. We should close FY20 with an AUM close to Rs 2,000 crore, up from about Rs 1350 crore now. We see our loan book in the range of Rs 4,000-4,500 crore over the next three years."
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