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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.

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