Access to funding for non-banks (non-banking financial companies, or NBFCs, and housing finance companies, or HFCs) has been challenging in recent times. However, over the past two weeks, there has been some change in market sentiment with gradual easing in funding access for non-banks.
50 large CRISIL-rated non-banks have debt repayments worth ~Rs 95,000 crore due in November of which, ~Rs 70,000 crore are commercial papers (CP) maturing.
While some non-banks are well-placed to meet debt repayments without drawing down on bank lines, others may have to do so, at least partially.
Apart from access to funding, another monitorable would be how asset quality – which has remained largely steady for non-banks in the recent past – pans out, especially in the non-retail financing portfolio containing loans to small and medium enterprises, loans against property (LAP), and real estate developer loans.
In October, the rollover rate of CPs issued by the 50 largest CRISIL-rated non-banks was only ~40% of the average monthly issuances between June and August 2018. Consequently, non-banks have had to tap banks for funds. In the past, issuances by financial sector entities have typically been fully rolled over or refinanced on maturity.
Nevertheless, CRISIL notes that CP volumes have increased in the last week of October 2018 and if the trend continues, rollover rates should be higher in November 2018.
“Non-banks with strong parentage and those belonging to large corporate groups have managed to partially roll over their CPs and raise funds through bank loans to a greater extent compared with peers, although they have had to pay higher interest rates,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings. “Selective lending by mutual funds means in the weeks ahead, continued access to – and timely – bank funding will be critical for non-banks.”
Recent steps by regulators such as the Reserve Bank of India and the National Housing Bank, and large banks such as the State Bank of India, to improve access to funds have benefited non-banks.
The announcement of further regulatory support measures such as a standby liquidity line can help avert situations of funding stress as seen recently.
CRISIL had, in its press release on September 28 titled ‘Liquidity cushion, a stress reliever for non-banks’, underscored that non-banks are maintaining adequate liquidity buffer in the form of cash and equivalents, and sanctioned unutilised bank lines to manage mismatches in their asset-liability maturity profiles. CRISIL also said it was important to have diversified and quickly accessible bank lines.
However, in the past one month, some non-banks have found it tough to quickly drawdown on bank lines, which led to some liquidity stress. Additionally, market sentiment challenges continue for select non-banks that are into housing finance and wholesale lending.
In this milieu, securitisation has emerged as a significant alternative to generate liquidity, especially for HFCs. Another funding avenue gaining traction is retail bonds. Non-banks have already raised ~Rs 27,000 crore through retail bonds between April and September this fiscal, compared with Rs 5,000 crore in the whole of fiscal 2018.
On the business front, non-banks have curtailed disbursements in the past month or so to conserve liquidity. Consequently, CRISIL expects growth to slow down in near to medium term. Given the situation on fund-raising and liquidity at the industry level, it bears re-emphasising that monitoring how the asset quality of the non-retail financing portfolios of non-banks pans out will be crucial.
“This stems from the sensitivity of borrowers in non-retail financing portfolios to prolonged funding crunch,” said Ajit Velonie, Director, CRISIL Ratings. “So while current delinquencies are not high on account of stringent credit appraisals and risk-mitigating mechanisms, if the funding situation for non-banks does2not stabilise over a period of time, asset quality challenges could manifest. In LAP, for instance, delinquencies on a 90 days’ past due basis are already on an upward trajectory, moving from 1.9% to 2.7% in two years.”
CRISIL will continue to monitor the position of non-banks with specific focus on their liquidity, access to the capital market and bank funding, as well as developments on the asset quality front.