Liquidity crisis, slump in valuations may hit NBFC funding plans

Mumbai: The liquidity crisis plaguing Indian non-banking financial companies, or NBFCs, which has spooked public markets investors, is likely to hit stake sale and fund-raising plans for these lenders in the near term.

The recent woes of NBFCs, which started with defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS), have hurt sentiments towards NBFCs, as witnessed in the stock prices of several leading companies in the sector.

The combined headwinds of the liquidity challenge and the tumbling stock prices have already impacted stake sale plans.

On 10 October, ET Now reported that state-owned lender Punjab National Bank and private equity firm The Carlyle Group had called off their plans to sell a 51% stake in mortgage lender PNB Housing Finance Ltd.

Industry experts also believe that in the current scenario equity fund-raising plans of NBFCs could also get impacted.

“I think the liquidity issue is going to continue for some more time. NBFCs relying on CPs (commercial papers) and bank financing need a change in their business models.

“The asset liability mismatch (ALM) is now becoming a serious issue. In the interim transition period, as the NBFCs adjust their business models, there will be pain in the sector,” said S. Harikrishnan, founder, Blue Lotus Capital, an asset management company focusing on private investments in public enterprises (PIPE) strategy.

Investors are likely to wait and see how the sector goes through this transition period, Harikrishnan said. “One can expect deals that are already in the market to get stalled or delayed, else being done on revised terms,” he said.

The financial services industry, especially NBFCs, is an important segment for private equity investments.

In the first half of 2017, private equity and venture capital firms had invested about $3.2 billion across 53 deals, while the corresponding period of 2018 saw investments of $4.1 billion across 74 deals, despite the rising non-performing assets and financial frauds in the banking sector, according to a report by EY and Indian Private Equity and Venture Capital Association.

In the near-term, NBFCs looking to raise capital will have to reset their valuation expectations, said an investment banker focused on the financial services sector, requesting anonymity.

“NBFC valuations were at stratospheric levels because people were expecting exponential growth. The growth was based on the assumption of several things, such as market opportunity, because retail is growing and because a large part of the banking sector was not lending aggressively. There was also a lot of liquidity available, equity as well as debt,” he said.

Given that short-term liquidity is being pulled out of the market, NBFCs that are very heavily funded by short-term papers will see an impact, he said.

“There will be short-term impact on valuations and this may reset expectations.”

Experts believe that the long-term potential of the sector remains intact and this correction could eventually provide private investors the opportunity to enter the sector at more attractive valuations.

“In order to take care of the ALM mismatch, these NBFCs will need to raise more equity. Once the valuations correct to more reasonable levels, investors’ interest will be back in the sector,” said Harikrishnan.

According to the EY report, with a significant section of the Indian population still not having been penetrated by financial services, there is a huge growth potential for the financial services industry as the economy continues to grow at a healthy rate of close to 7%.

“The financial services sector is the fuel to any economy’s growth and should generally grow at 3-4 times its gross domestic product growth rate,” the report said.