NBFC Squeeze

NBFCs are scurrying around for funds to cope with falling market valuations, asset-liability mismatches and rising delinquencies.

Illustration by Ajay Thakuri Illustration by Ajay Thakuri

Dewan Housing Finance is going the IL&FS way or will be eventually sold if the problem is not fixed expeditiously," says a CEO of a Mumbai-based non-banking finance company or NBFC.

The company has been struggling with asset-liability mismatches. So far, it has taken a decision to divest two group businesses (education loan and affordable housing finance companies), sold a part of its assets and claims to have repaid over Rs 30,000 crore to creditors, including fixed deposit holders. But the mismatches refuse to go away. It desperately needs to raise longer-term funds, ensure faster sell-down of loans to builders and bring strategic investors. Any delay will push the company, which has a bank loan exposure of close to Rs 40,000 crore, in the danger zone. The recent credit rating downgrade has already closed the fixed deposit window.

Another NBFC, Reliance Capital, with interest in a host of financial services, including insurance, is facing repayment issues with two of its financial services arms - home finance and commercial finance units. This Anil Ambani-owned company has already decided to sell its non-core investments in media and entertainment, private equity, radio, etc. This week, it decided to sell the entire stake in the mutual fund business. Another fast-growing NBFC, Indiabulls Housing Finance Ltd, has also come under pressure due to its risky large ticket commercial real estate and loan against property portfolio. The company claimed to have raised Rs 50,000 crore in the last six months to improve its liquidity and liability profile. Luckily, Indiabulls Finance has got a prize catch in terms of the proposed merger with private sector Lakshmi Vilas Bank.

Dewan Housing and Reliance Capital are just some examples of how the mismatch between long-term assets and short-term liabilities has completely exposed the NBFC business model dealing with secured mortgages. Exactly a year ago, IL&FS was caught in a similar situation - it did not have enough money to meet its repayment obligations. The crisis - whose roots lie in the fact that NBFCs get access to only short-term funds that they have to keep rolling over, leading to asset-liability mismatches when liquidity becomes scarce - is affecting the entire NBFC sector. The trouble had started when the Reserve Bank of India, or RBI, moved in to clean up bank balance sheets four years ago. As skeletons started tumbling out from the cupboard of corporate India, money from banks and mutual funds, the two big sources of funds for NBFCs, started drying up. That is why those who lent to the riskiest part of the corporate universe - real estate players, home finance companies and those giving loan against property - are getting hit the most. The unaffected NBFCs such as HDFC and Bajaj Finance have the backing of a strong promoter or group, rely less on builder loans and have a much more diversified asset and funding profile.

Analysts predict a sluggish market for at least the next one year. "Liquidity management will be tough for many players," says Jaikishan Parmar, Senior Equity Research Analyst at domestic brokerage firm Angel Broking.

The stock market is expecting margin compression as the cost of new funds is higher, asset quality has deteriorated and loan book is seeing low to moderate growth. NBFCs are doing everything they can to get out of the situation.