Liquidity Scare: NBFC stocks slide on fears of spillover
Any default or downgrades in NBFC space will have a cascading impact on the entire sector.
In addition, on Tuesday, CARE Ratings put PNB Housing Finance on watch with developing implications as it needs to raise money to maintain comfortable capital adequacy and gearing levels. CARE had lowered securities of Reliance Home Finance Ltd (RHFL) and Reliance Commercial Finance Ltd (RCFL) to junk and default status on Friday.
“Any default or rating downgrades in NBFC space will have a cascading impact on the entire sector where rollover of debt will be difficult for the firms with weaker balance sheets,” said Gaurav Dua, head of capital market strategy at Sharekhan.
“The cost of funding would also increase in the time of crisis,” said Dua.
The shock IL&FS default last year sparked a liquidity crisis that roiled the market as NBFCs struggled for cash. Another liquidity scare could intensify pressure on the sector, especially on those NBFCs that aren’t top rated, analysts said.
The BSE Bankex fell 1.22 per cent on Tuesday while the BSE Finance index declined 0.6 per cent. Reliance Capital, IFCI, PNB Housing, Edelweiss Financial Services, DHFL, Indiabulls Housing Finance and L&T Finance declined between 5 per cent and 10 per cent.
The cost of funding between triple-A rated NBFCs and those that aren’t is at 60-100 basis points compared with 20-40 bps before August. One basis point is one-hundredth of a percentage point.
“Refinancing risk has once again emerged after almost six months and at this juncture NBFCs are finding it difficult to raise or rollover the funding as banks or mutual funds are not in a position to lend to these NFBCs,” said Ashutosh Mishra, head of institutional research, Ashika Stock Broking. “Inflows into debt funds have reduced considerably in the last six months after the IL&FS default and a few rollovers of FMPs (fixed maturity plans).” The inability of some mutual funds to repay FMP holders in full after making unsecured loans to promoters also stemmed from the IL&FS crisis.
Mutual funds are estimated to have over Rs 5,000 crore invested in eight Reliance Group companies, of which nearly Rs 2,600 crore is in RHFL and RCFL securities. Reliance Mutual Fund holds about two-thirds of the two companies’ bonds, according to a market estimate.
The NBFC crisis spilled over to some banks as well. IndusInd Bank fell nearly 6 per cent because of worries about its exposure to Reliance Group companies.
“Many investors are now worried about what could happen to IndusInd Bank as they also have exposures to the controversial ADAG group where companies have been downgraded on Friday evening,” said Suresh Ganapathy, research analyst, Macquarie Capital Securities (India). “IndusInd does have exposure to the ADAG group and hence there could be some more provisioning going ahead.”
Reliance Group was formerly the Anil Dhirubhai Ambani Group, or ADAG.
Mutual funds, the main source of funding for NBFCs, have slashed their exposure to NBFCs since the IL&FS crisis in September. Their exposure to stressed business houses such as Essel and Reliance Group is anywhere between 4 per cent and 15 per cent of the total, estimates Credit Suisse. About a 10th of this, or Rs 2,200 crore, is through close-ended plans with more than half maturing now, it said. The remaining Rs 18,100 crore is through open-ended funds, according to Credit Suisse.
However, some believe that NBFC crisis is temporary and the central bank will make sure liquidity in the system is adequate.