Is LIC emerging as the lender of last resort for the battered NBFC sector?
Anand Adhikari August 12, 2019
At a time when doors to short-term commercial paper (CP) market are nearly shut for the Rs-29 lakh crore asset size non-banking financial space, the Life Insurance Corporation (LIC) with war chest of funds is diving in with long-term funds for the NBFC sector. It is a win-win for both.
The insurance giant is known to have stepped in to bail out public sector companies including banks over the last couple of decades whenever they were in dire need of funds. In fact, many under-subscribed equity issues of PSUs were bailed out by LIC. In the past, the corporation has also pumped in much needed debt and equity capital into public sector banks (PSBs) when government finances were tight for capital infusion in banks due to high fiscal deficit.
Sources suggest LIC is playing a similar role for the battered NBFC sector, which is running around for meeting their short-term asset liability mismatches. The sector has already seen a spate of downgrades because of delay in payments and weaknesses in their funding mix. What is interesting is that some NBFCs are getting long-term funds from LIC , which will not only bring stability in their balance sheet, but also help in lending further. Post IL&FS and DHFL failing to meet their debt obligations, the short-term commercial paper market is almost shut as investors (mutual funds, insurance players etc) have not been rolling over existing CPs. They have also not taking fresh loan exposure. The stock market valuations of many NBFCs are down, thereby putting pressure on promoters who have pledged their shares to raise money.
Two NBFCs with established background that got a credit line from LIC are M&M Financial Services and Piramal Capital & Housing Finance. Sources suggest M&M Finance signed a deal with LIC last week for a Rs-2,000 crore funding. The money is coming by way of 10-year non convertible debentures. The coupon rate is in upwards of 8 per cent , which is very good as interest rates are coming down. Piramal Capital and Housing Finance received Rs 1500 crore from LIC few months ago.
LIC is lending a helping hand when the RBI has made it clear that it will not bail out any NBFC or open a separate liquidity window. RBI has been providing enough liquidity to banks, which they can on-lend to NBFCs. They can also buy out their loan portfolios. LIC interest in NBFCs is, however, restricted to well-established NBFCs with reputed names.
The financing of NBFCs works well for LIC as interest rates are already easing in the domestic market. The 110-basis points cut in the repo rate by the RBI in the last six months with accommodative stance already indicates that both deposit rates as well as lending rates would see a downward pressure. Globally , central banks are softening rates because of slowdown and recession fears. So, it is a good time for LIC to lock in funds at 8 per cent-plus interest rate for a tenure of 5-10 years.