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MOSL: FINANCIALS – NBFC-Retailization and liability diversification – the key themes

Financials - NBFC: Retailization and liability diversification – the key themes

 

We attended a seminar on the NBFC sector organized by CRISIL, which saw participation of companies across the lending spectrum (housing, vehicle, wholesale, infra financing and fintech). Key takeaways:

• The crisis of confidence about the sector appears to have turned the corner, with all participants having a unanimous view that the liquidity situation is gradually improving (commercial paper roll-over up from 40% in October to 75% in November) and that stabilization is just a few months away.
• However, the liquidity situation for NBFCs may continue remaining tight and the growth rates are likely to moderate. To tackle these pressures, companies are likely to shift their focus toward matched ALM and liability diversification (most participants are looking to raise funds via the retail channel – retail NCD/deposits).
• Since demand at the ground level remains strong, companies are not much concerned about asset quality in the retail segment. The coast is not as clear for the wholesale segment, though.

Easy liquidity – a thing of the past; focus shifting toward ALM management

• Post demonetization, NBFCs primarily relied on short-term borrowing to gain market shares amid easy access to money. Notably, over FY14-1HFY19, the share of commercial paper (short-term notes) in overall resources increased from 7% to 16% for NBFCs and 4% to 13% for HFCs. This helped in at least 40-50bp cost saving, which in turn, helped (at the RoA level) generate 20-25bp of additional profitability. However, post the recent crisis (especially after the IL&FS default), the focus now is more on ALM management to reduce the risk of loss from not meeting debt obligations.