NBFCs have been facing liquidity problems since the past month following the IL&FS crisis
In a bid to deal with ongoing liquidity crunch, non-banking finance companies (NBFCs) and housing finance companies (HFCs) are approaching private equity (PE) funds and overseas debt markets to raise capital, Mint reported.
NBFCs have been facing liquidity problems since the past month following the IL&FS crisis. The government and Reserve Bank of India (RBI) have stepped in and announced various measures to allay investor concerns.
Liquidity in the banking system has turned to a deficit of Rs 1.16 trillion at the end of October from a surplus of Rs 20,200 crore at the beginning of August, according to Bloomberg data.
Read — Editor's Take | Easing the liquidity squeeze in NBFCs
Industry experts see the current situation as an opportunity for private equity (PE) funds to invest in NBFCs as valuation expectations for the sector have moderated considerably, the report said. The IL&FS crisis prompted banks and mutual funds to go into a risk-averse mode.
The short-term commercial paper (CP) rates have also shot up. "In the last three months, on account of Reserve Bank of India hiking the repo rate by 50 basis points and tight liquidity conditions, CP rates have shot up by 1-1.5 percent," Anil Gupta, Vice-President and Sector Head at ICRA told the paper.
A higher CP rate would mean the NBFCs and HFCs have to pay more interest on the funds they raise, therefore, these companies are exploring external commercial borrowings (ECBs) to raise capital.
Read — NBFC liquidity crisis: Banks see room for growth
Some of the top-rated HFCs are able to raise short-term CP money at interest rates ranging between 8.1 percent and 8.9 percent. In the case of ECBs, the cost of raising funds for AAA-rated NBFCs for a five-year period is below 9 percent, including the hedging cost, the report said.
"ECBs as a source of funding has become extremely significant right now, considering NBFC-HFCs need to reduce their short-term liabilities," Monu Ratra, chief executive at IIFL Home Finance told the paper.
Ratra, however, pointed out the credit rating of the firms may play a crucial while raising funds.
"Stronger NBFCs may still be able to raise money from the debt markets but the weaker ones may have to raise equity at discounted valuations, Mahesh Singhi, Founder and Managing Director of investment bank Singhi Advisors told the paper.
Also Read: IL&FS timeline: When and what happened so far
Piramal Enterprises is also looking to raise $250 million through ECBs for its housing finance business, Ajay Piramal, Chairman, said in a recent interview. The company is also exploring opportunities with PE funds to acquire select portfolios.
In the current scenario, ECBs may seem to be a better option for these firm to raise capital. "ECBs allow you to raise long-term funds and if a firm can raise that money, it is a good route to go for. The market has been concerned about asset-liability mismatches (ALM) and ECBs take care of the ALM issues. In a rising interest rate scenario, if the ECB fund-raise is fully hedged then the firm is locked in at that rate for five years, hence hedged against rising rates," Kapish Jain, chief financial officer at PNB Housing told the paper.
