Read below, Aseem Dhru’s Article on NBFC Crisis titled ‘The Pendulum is Swinging the Other Way’
Excess of anything is not good. In FY 14 Bank Credit grew at 13.9% while NBFC credit growth was 15.6%. By FY 18 NBFC credit growth rate shot up to 21.2% vs 10% of banks! The pendulum had clearly swung to one extreme.
NBFCs/HFCs borrow wholesale liabilities from Banks Mutual Funds and Insurance Companies and lend retail. Falling interest rates, easy availability of bank finance (for lack of alternatives)and a benign credit cost led to this breakneck growth.
The stock markets and investors loved this and kept pouring money taking valuations to 4-5 times book and in many cases a lot more. On a lighter note, this gold rush attracted its share of miners and along with a few credible names, a lot of idiots including yours sincerely thought they could set up an NBFC so we had one a day coming up.
The markets gave equity at rich valuations and banks/capital markets gave debt at cheap rates. NBFCs pile up debt and how! Today System level borrowings for NBFCs/HFCs have reached Rs.4.5 trillion by banks and Rs. 12.3 trillion by market borrowings. What’s even more intriguing is that Mutual Funds have lent Rs. 1.05 trillion in CDs and almost Rs. 1.5 trillion in CPs. How did a housing finance company or an NBFC put up a 15 years asset on a CP borrowings? As Buffet said,” Only when the tide goes out you discover who’s been swimming naked.” It is that time now.
40% of NCD debt is going to come up for refinancing by March’19. The recent debacle at IL&FS has flagged off fear about rising systemic NBFC debt exposure and given the current liquidity conditions, banks and markets will cut exposures. NBFCs have a structural weakness that they borrow from banks and lend to banks’ customers and in these market conditions, it is advantage banks.
The pendulum now moves from one extreme to another as now it is advantage banks. Granular borrowings and granular lending is a model that works in all weathers. Today, NBFC lending at Rs. 20 trillion is close to private sector banks. It is time that RBI accepts NBFCs as a key part of the financial system and allows borrowings at their repo windows or creates some liquidity arrangement for them so that one player’s weakness does not create a system panic. In the financial world, it is all interlinked. No one is safe from the contagion effect and if one large player sneezes the system catches pneumonia and that’s where we are at this moment.
The current storm on NBFCs. This too shall pass, but in its passing, will separate the wheat from the chaff.
Bookings are closed for this event.
Date(s) - 17/12/2018
5:00 pm - 6:30 pm