Though the worst seems to be over for the NBFC sector, growth will taper for non-banking finance companies in the second half of this financial year. The scars left behind by the September-October crisis will have ramifications on growth, asset quality and eventually the funding profile of the NBFCs. Companies will now focus more on asset liability management (ALM) to keep up liquidity flows to the sector, says a report.
The report, released by ICICI Securities after attending a well-gathered seminar last week in Mumbai, says the concerns around a compression in profitability for the NBFCs and the asset quality risk in the whole-sale segments like developer financing and loan against property (LAP) are real and the NBFC that will differentiates itself will be able to keep a tight control over its credit costs. This is going to be the year of old NBFCs, it says.
Authored by research analysts Santanu Chakrabarti and Abhijit Tibrewal, the report also says starving the sector of liquidity could impact the small and medium enterprises (SME) segment and the job creation in the economy. It also says the time has come for segmentation in the NBFC space.
Key themes highlighted by the report are:
*The NBFC sector is expected to grow at 5-7 per cent in the second half of the current financial year. Wholesale segment/LAP credit growth is expected to remain subdued in H2 while the momentum in home loans/vehicle finance would continue. On the asset quality front, retail assets like vehicle financing and housing loans should continue to hold up while the wholesale financing segments like developer loans, LAP and to some extent SME might display some stress.
*In the lending business, right pricing of the loans is critical. In the past, credit risks were not priced appropriately by the NBFCs and the banks alike. However, the recent liquidity crisis has been an eye-opener of sorts for the financial services participants and as a result credit risks would now be priced appropriately by the lenders. Unsecured lending now forms one-third of the retail credit. While these are still early days, it is important to price the unsecured personal loans appropriately, otherwise it runs an asset quality risk, going forward.
*It is unfair to classify all non-banking financial companies under the umbrella term ‘NBFC’ and mandate them to follow the same set of guidelines and regulations. Time and again, in multiple forums, it has been emphasised that there is a dire need to segment the NBFCs just like the segmentations in the banking space. Once classifications/ segmentation for the NBFC universe is in place, there can be different sets of regulations that govern them. NBFCs with longer vintage and ones that have proven themselves over multiple cycles should not be viewed under the same regulatory lens as a relatively newer NBFC.
*Concerns around the real estate/construction finance sector are not unfounded. There seems a consensus among market participants and the investment community that the current liquidity situation could lead to a contagion effect in the real estate sector and more particularly the developer/construction financing segment and LAP. While NBFCs/HFCs that have exposure to the developer segments believe that construction finance is self-liquidating and that most of their funding is ring-fenced at the SPV level, there are visible signs of a chronic slowdown in disbursements to the developer community. This has resulted in the weaker developers finding it increasingly difficult to access liquidity leading to delays in construction milestones and consequently might result in deterioration of the asset quality.
*ALM risk is the most counter-productive risk. Arguably, the biggest reason why some NBFCs take ALM risk by financing long-term assets with short-term liabilities is to gain an additional 10-20bps in return on assets (RoA). But the ALM risk is not worth it. It is now essential to have a diversified liability franchise. There will be cycles and there will be rainy days. Ones who are in a permanent state of preparedness will come out stronger than ever.
*Securitisation will emerge as one of the preferred routes for liability. With securitisation there is no maturity mismatch risk and no inherent interest rate risk. In other words, securitisation is door-to-door matched. While banks have been big participants in securitisation done by NBFCs, the mutual funds (MFs) have typically been shy of participating in it because of ambiguity over taxation. This ambiguity, which has now been put to rest by the judiciary, could see enhanced participation of the MFs in the securitisation of the NBFC loan book. However, for this to happen, securitisation should offer a platform wherein the loan servicing and collections could be done by a third-party.
*In the short to medium term, the spreads would be squeezed and net interest margins (NIMs) would be under pressure. Essentially, if an NBFC can rein in the credit costs and has a strong control over the asset quality; it can still show profitable growth.