With $22 B Gone, Indias NBFCs To Face Darker Days

As key engines of loan growth in the world’s fastest-expanding major economy, they once were investor favourites. But now traders won’t go near India’s non-banking financial companies (NBFCs).

About $22 billion has evaporated from a group of almost two dozen non-banking financial companies since August 31, before confidence was rocked. And investors arent rushing to get back in, according to Citigroup analyst Manish B Shukla.

Despite the sharp correction in stock prices of NBFCs, most investors are cautious on these names given near-term uncertainties, he wrote in a report earlier this month. He notes volatile third-quarter results, and potential funding tightness after the recent events, may be reasons for the lingering skepticism in the sector.

Missed payments

Until last summer, non-banking financiers were a major part of investment portfolios. But a series of missed payments by one of the biggest firms, Infrastructure Leasing & Financial Services (IL&FS) – once categorised as systemically important by the central bank – then roiled India’s stock market. Now, the nation’s shadow-lending industry, which accounted for nearly four out of every 10 consumer loans in the last three years, has grown more cautious about extending new credit amid a funding crunch of its own.

From small-ticket loans for smartphones to funding large apartment clusters, the firms have a finger in every pie. At some point, the growth in their loan books even rivalled that of the state-run banking giants facing lending restrictions owing to the large burden of bad debt.

“We believe NBFC growth will disappoint and there is a marked slowdown for most, which is now starting to reflect in their valuations,” said Nilesh Shah, who helps oversee $24 billion as chief executive officer of Kotak Mahindra Asset Management Co. He noted that his firm has reduced its exposure on both debt and equity funds, without saying by how much.

Adding to the pain

In the race to grabbing opportunity, the companies ended up creating an asset-liability mismatch, according to Shah, who said the IL&FS default and tight liquidity in the banking system only added to the pain. India’s banking system liquidity is still in a deficit of 1.2 trillion rupees ($16.9 billion).

And the blows keep coming – India’s property developers are finding it hard to borrow money, raising the prospect of a wave of debt defaults from the sector hitting shadow lenders that are trying to survive their own funding crunch.

Some brightspots

That said, Kotak’s Shah is not calling it a day yet. “We look to rebuild the portfolio over a period of time, especially in NBFCs which have good governance, good asset quality, and reasonable liability franchise, but again the process will be gradual,” he said. “In this correction, those stocks are worth adding.”

Indian shares, which were the best in Asia in 2018, have lost more than $100 billion in value this year as uncertainty surrounding upcoming elections, an ongoing bad-debt issue, and high valuations have kept investors on the sidelines.

And when it comes to non-bank lenders, the plunges have been rough. Since the end of August, shares of mortgage lender Dewan Housing Finance Corporation have sunk nearly 80 per cent, while Reliance Capital has fallen 65 per cent and Edelweiss Financial Services has lost 47 per cent.

“As far as our own portfolios are concerned, weve been quite cautious,” said Anand Shah, head of investments at BNP Paribas Asset Management India . NBFCs that are lending to riskier sectors like infrastructure or construction companies are still struggling to get liquidity, he added.