Large NBFCs may tap equity markets in next 6-12 months
PremiumAs much as $3-4 billion is the tentative capital infusion required for NBFCs this year: experts
Several non-banking financial companies (NBFCs) are likely to hit the market over the next six months to a year to raise equity, aiming to tap robust capital markets, said industry experts.
NBFCs are expected to scout for funds through various routes, including initial public offerings (IPOs), capital markets, qualified institutional placements (QIPs), and external commercial borrowings (ECBs).
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2 min read . 09:43 PM ISTSome non-banks who are also preparing to raise money from the market include HDB Financial Services Ltd, a unit of HDFC Bank Ltd, Motilal Oswal Home Finance Ltd, a unit of Motilal Oswal Financial Services Ltd, Indiabulls Housing Finance, Hero Fincorp, the financial arm of Hero MotoCorp Ltd, and technology-enabled lender to small businesses Ugro capital, 6 people aware of the development said.
“As much as $3-4 billion is the tentative capital infusion required for NBFCs this year and even if 70% of this comes from debt, maybe $1-1.5 billion will come from equity," said Dinesh Arora, deals leader at PwC India.
“Over the next 6-12 months, a lot of NBFCs aim to raise money through the equity route. This could be through QIPs or IPOs or through private equity. Those who are not able to raise through these methods could go into consolidation but that will take time and the firms will try to raise equity," he said.
The capital adequacy ratio, the capital buffer signifying a financial service firm’s financial stability, of NBFCs is in the range of 19-25% on average, against the regulatory requirement of 15%.
However, there may be a need to increase liquidity and sustain the upcoming demand for credit for which many non-banks are looking to leverage the market.
“The fund raise is anticipated as the markets, especially the IPO market, are good and there are not many other avenues of fund raising. The secondary markets have already been overshot, so this is a good time to leverage (the primary markets)," said Mahesh Thakkar, director general, Finance Industry Development Council (FIDC), a self-regulatory body for NBFCs registered with the Reserve Bank of India (RBI).
This comes at a time when growth among NBFCs has taken a hit during and even before the pandemic with a slowdown in liquidity from banks and financial institutions.
RBI data showed recently that the consolidated balance sheets of NBFCs grew at a slower pace in the second and third quarters of FY21 than the corresponding quarters of FY20. Balance sheets of NBFCs grew 13% from a year earlier in Q2 and 11.6% in Q3, RBI said in its bulletin for May 2021 released earlier this week.
“The business growth of 15-20% over the past years has slowed down and once the pandemic is over with more people getting vaccinated, demand (for loans) will shoot up," Thakkar said.
“For the top 100 NBFCs, getting liquidity is not a problem as they are growing but will raise money from the market. For small and medium NBFCs, which have AUMs of less than ₹500 crore, banks are not willing to lend and while they may survive, for growth to come, they will need money but have lower ratings," he said.
Smaller NBFCs have through the FIDC written to the central bank, requesting liquidity support as they continue to face challenges in raising funds.
The Reserve Bank said the impact of the pandemic can be seen on both asset quality and liquidity. “Asset quality of NBFCs witnessed improvement in 2020-21 so far, compared to Q4FY20 on account of regulatory forbearance. However, gross NPA (non-performing asset) ratio of NBFCs was elevated in Q1 and Q2FY21 compared to the corresponding period in 2019-20," the bulletin said.
“Anecdotally, momentum is stronger than before. There are initial concerns on recoveries, rising delinquencies that may disrupt the growth of financial companies," Arora said.
Fears of a stricter lockdown amid the second wave of covid-19 may hit asset quality of retail loans, affecting the fund-raising ability of housing finance firms and NBFCs via the securitization route, ICRA Ratings said in a recent report.
Loan securitization is a process in which an underlying pool of assets is packaged and sold as financial instruments to investors.
NBFCs also moved towards longer term borrowings in tune with the tenure of their assets to manage their asset-liability mismatch.
Typically, NBFCs raise a large portion of their funds from banks and select NBFCs are permitted to collect deposits from the public. About a third of the funding comes from the market, including capital markets, public offerings, QIPs, overseas funding, and debt instruments.
The number of deposit-taking NBFCs have gradually reduced to 64 currently. Six of those have been prohibited from accepting further deposits.
There were 9,507 NBFCs registered with the Reserve Bank as on 31 January 2021.
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