Moneycontrol Wealth Creator Awards | NBFC crisis a panic more in the mind than on balancesheet, says Axis MF chief

The non-banking finance industry is facing a massive liquidity crunch in the aftermath of a default by shadow banking behemoth Infrastructure Leasing and Financial Services (IL&FS). But Chandresh Nigam, MD and CEO, Axis Mutual Fund, believes the panic is more in the mind than on the balancesheet.

Mutual funds have invested in NBFCs for over two decades, and it has been among the top-performing sectors for most fund managers, he pointed out in a panel discussion on 'The NBFC crisis and its implications on the financial service industry' at the inaugural edition of the Moneycontrol Wealth Creator Awards 2018, held in Mumbai on November 16.

There is a lesson to be learnt on due diligence from this crisis. "We won't let the crisis go waste. We will learn from it," he said.

R Sridhar, CEO at IndoStar Capital, also expressed similar confidence. "The cyclone has passed without much mayhem... the party will continue," he said. While he did add a word of caution that there could be asset-liability mismatches and leverage-issues which could return on equity of certain NBFCs, he said newer partnerships with financing sources should develop soon.

He stressed on the point that NBFCs are the last mile credit deliverers and if they fall then small finance may dry up. Therefore, it is most likely they will continue to be able to use the balancesheet of banks for funding.

On the stance of the banking industry on lending to NBFCs, Dinesh Kumar Khara, MD, State Bank of India (SBI), said, “Banks are not averse to lending to NBFCs. We have even subscribed to non-convertible debentures (NCDs),” said  However, he said banks are more selective while lending due to the asset-liability mismatches. He too believes the lapse of confidence in NBFCs has been mended in recent weeks.

According to Sanjay Doshi, Partner, Head Financial Services - Deal Advisory and Head of Valuation, KPMG India, the NBFC financing model needs to undergo some corrections. Housing finance companies need to see how to run some of these models, especially in the affordable housing category. "They have to go back to drawing board to work on their ALM mismatch," he said.

Talking about the implications of the crisis on the real estate sector Niranjan Hiranandani, Co-Founder & MD, Hiranandani Group, said post-demonetisation and implementation of RERA, the funds required for any construction has gone up three times. And in a system where input costs have gone up and credit has been hard to come by, NBFCs and HFCs have been a lifeline for property developers.

“The real estate sector is in a soup after the default by IL&FS. If liquidity continues to be tight, there will be no new projects, and all those who are overleveraged will now be in dire straits,” Hiranandani said.

The implementation of the Real Estate (Regulation and Development) Act, 2016, has led to greater regulation, empowering homebuyers, but adding to the pressure on developers to overcome any potential liquidity shortfall and deliver projects on time, he noted.

Khara pointed out the need for NBFCs to revisit their asset quality. “Some NBFCs have been mindful of their credit situation, while others have preferred unbridled growth,” he said. He added that the system was sound since most NBFCs have taken the former approach.

The pruning of the time window for declaring a loan as non-performing, from 180 days to 90 days, is also a good move to improve asset evaluation, according to Sridhar.

On the question of how asset-liability mismatches can be prevented in the future, Sridhar said it is counterproductive to assume that liquidity inflows are continuous. If we assume liquidity will be available forever then we can fall in trouble like this time.