There are many investors who are adopting a cautious approach while investing in NBFCs. Before we start why, let us brief you a quick background on the recent developments in the NBFC space.

Non-Banking Financial services (NBFCs), including Housing Finance (HFC), segment has been in the eye of storm for the past one month. There has been an incessant flow of negative news, both macro as well as micro, that has caused this ‘confidence deficit’ towards the sector.

Chain of events that started with IL&FS defaulting on its debt obligations led to the fear of liquidity crunch in markets, this was followed by Reserve Bank of India (RBI) expressing its view of introducing stricter monitoring norms for NBFCs and the most recent development being default by some real estate developers on their debt payments to banks, raising doubts over the quality of mortgage assets held by NBFCs/HFCs.

We at R&R have analysed the facts on ground and strongly believe that markets today are driven by fear rather than the fundamentals. Stocks have been beaten down due to expectation of liquidity crunch in the market. Many believe that post-IL&FS default, both mutual funds and banks would be reluctant to lend to the NBFC sector.

We urge our clients to consider the following factors and decide for themselves, how probable is this scenario, where our economy is projected to grow at 7.3-7.5% YoY without NBFC contribution.

Our Assessment

  • We would like to draw attention to a very important fact that the Indian GDP growth story of 7.5%-8.0% is primarily driven by the “STRENGTH OF THE INDIAN CONSUMPTION DEMAND”. The same will get derailed if there’s a prolonged credit crunch in the system.
  • Asides, any default will be a systemic risk on the Indian financial system, which will have its ripple effects on the country’s credit rating, it would derail the FDI/FII flows and will be a huge negative for the current government in the run-up to the upcoming general elections.
  • Having said that the asset-liability mismatches and near-term Mutual Fund debt maturities at some of the NBFCs may bring volatility; however, we firmly believe this situation will be managed by intervention by the regulators. It is largely the paper maturing in Oct-2018 and Nov-2018, which is of significant quantum. If this can be tide over, then the overall situation should be manageable. We have seen in the past too, RBI coming in at the time of crisis on liquidity, putting in steps like opening up the Repo window for a mutual fund, etc.
  • Our view is that the concerns of this liquidity constraint cascading into distress is very much exaggerated. Having said that, the current situation warrants stricter regulation on asset-liability mismatches, which will go a long way in strengthening the NBFCs.
  • We remain long-term investors in NBFCs & HFCs that have strong asset as well as liability franchises, with access to lower cost of funding, strong liquidity with lowest risk asset-liability mismatches and leadership in product segments, wherein they have pricing power backed by their strength of distribution network and swifter turnaround times for credit sanction & disbursal with healthy asset quality and provisioning coverage. In fact, we are of the firm view that many stronger players would use this opportunity to grab further market share and consolidate their position in the sector.