Over the past year, non-banking finance companies (NBFCs) have continued to face liquidity concerns. If the coronavirus (COVID-19) situation prolongs, leading to extension of lockdowns, challenges for the sector could mount substantially, says a research note.
According to the report by CARE Ratings, borrowing profile of NBFCs has changed significantly from capital market instruments to bank borrowings. Additionally, debt issuance in primary market shows that the share of financial services has come down since March 2019, while it has increased for the other segments indicating shift in the borrowing pattern with corporates shifting to debt market. However, with the outbreak of Covid-19 the challenges have increased further, this time in the form of asset quality.
The ratings agency says, "Amidst these increased issues, the funding challenges could mount again, as banks become more selective in extending credit. Also, mutual funds (MFs) are expected to shy away from lending to the sector as they witness redemption pressures. The increase in risk aversion of investors has also led to reduction in allocations by MFs, resulting in lowered issuance of commercial papers. Further, securitization, which has been one of the major sources of funding for NBFCs during the last 18 months, could take a pause as collections remain uncertain during moratorium. The scenario of collections seems weak at this stage, though the extent of collections would differ from company to company."
"Funding has been made available by Reserve Bank of India (RBI) to provide special refinance facilities of Rs50,000 crore to National Bank for Agriculture & Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB) for on-lending to NBFCs. However, some measures announced by RBI like the targeted long-term repo operations 2.0 (TLTRO 2.0) have been partially successful as the banks choose to bid half the amount put by the RBI," it added.
Post-September 2018, the NBFCs went through a period of tight liquidity which restricted their funding avenues and increased their cost of borrowing. The sector had to respond through slowing down disbursements, reducing capital market borrowing, correcting asset and liability management (ALM) profiles and building up liquidity buffers. As the sector was slowly beginning to emerge out of that crisis, it is now starring at the unprecedented COVID-19 situation.
"It is interesting to witness the shift of NBFCs borrowings from capital market instruments to banks after September 2018. The following table shows that NBFC borrowings from MFs are declining, while banks outstanding advances to NBFCs are increasing. The overall funding available to NBFCs has been increasing despite declining funding from MFs," CARE Ratings says.
According to the ratings agency, the (COVID-19) outbreak has come at a time when NBFCs have witnessed improvement in liquidity buffers as companies reduced their short-term borrowings (including commercial paper) and have shifted to bank borrowings.
Banks’ lending to NBFCs registered a growth of 47.7% during September 2018 to March 2020. In the current situation, where NBFCs are struggling to raise funds from capital market due to higher cost and lack of availability of funds, there has been a shift to bank borrowings from market borrowing, the ratings agency says.
The overall composition of NBFCs in bank credit increased from 6.2% in July 2018 to 7.4% in March 2019 and further to 8.8% in March 2020.
The proportionate share of debt-oriented scheme is 31.7% of industry assets in March 2020, up from March 2019 levels as the share of equity-oriented schemes decreased from 42.5% in March 2019 to 39.7% in March 2020 due to reduction in value because of sharp fall in equity market, the report says.
As per CARE Ratings, investments in CPs of NBFCs are on a consistent monthly decline. After the liquidity crisis triggered in the NBFC space, MFs (mutual funds) withdrew over 50% of their investments from this category. The percentage share of funds deployed by MFs in CPs of NBFCs in March 2020 fell to 3.3% of debt AUMs, lowest since July 2018 when it was 11.3%, and the amount held declined to just Rs.0.44 lakh crore. The decline in investments in corporate debt paper of NBFCs at Rs.0.94 lakh crore in March 2020 was lower. The percentage share declined to 7.2% compared with 7.7% in July 2018, it added.
Amid severe liquidity crunch and the aftermath of NBFC crisis, NBFCs had limited funding access to primary market and hence banks became the major source of their financing needs. As can be seen in below chart, total monthly funds raised by NBFCs from primary market stood at Rs0.3 lakh crore in March 2020 as compared with Rs0.8 lakh crore in March 2019.
To mitigate the burden of debt brought about by disruptions due to Covid-19 pandemic the RBI announced certain regulatory measures. The RBI announced three months moratorium to borrowers of both banks as well as NBFCs. All NBFCs have extended the option of giving moratorium to their borrowers restricting to those who would like to avail this facility.
There was some lack of clarity on whether NBFCs can avail moratorium on their borrowings from bank. However, after an extended meeting of top banks and NBFCs with RBI governor on 4 May 2020, banks have agreed to extend moratorium to their NBFC and housing finance company (HFC) clients selectively on case-by-case basis.
