Mumbai: A spate of rating downgrades over the past fortnight has stoked fears of another impending liquidity crisis in the non-banking financial company (NBFC) sector, with a cascading effect on the broader markets that have been on a fragile road to recovery since the Infrastructure Leasing & Financial Services (IL&FS) crisis broke out last September.
In recent weeks, rating agencies have revised credit ratings of certain debt instruments of Reliance Capital firms Reliance Commercial Finance (RCFL) and Reliance Home Finance (RHFL) to “default", or D, on account of the deteriorating financial profile of its parent. A “D" rating means that the instruments in this category are either in default or expected to soon be in default.
On 2 May, more downward revisions followed, with CARE Ratings placing PNB Housing Finance Ltd (PNBHFL) on a rating watch with developing implications due to its requirement for raising money to maintain comfortable capital adequacy and gearing level. Besides, the Insurance Regulatory and Development Authority (IRDAI) on Friday said the insurers with exposure to RCFL and RHFL will have to make provisions for debt following their downgrade.
These follow the downgrades at mortgage lender Dewan Housing Finance Ltd (DHFL) earlier this year, following the IL&FS crisis and the scare of defaults at several corporates, such as the Essel Group. These events meant that several debt market investors, such as mutual funds, slowed down on lending, further squeezing liquidity for NBFCs and housing finance companies (HFC).
Industry watchers said the latest developments are likely to raise fresh concerns of asset-liability mismatch, which in turn, could further push up the cost of funds for the NBFCs and HFCs, which are already reeling under tight liquidity conditions.
“Cost of funds for NBFCs have gone up by 50-60 bps over the last seven months. The recent events have led to a situation where NBFCs could face a challenge in terms of availability of funds. So, the next one week is crucial as it will decide whether cost of funds will go up further," said Umesh Rewankar, managing director and chief executive, Shriram Transport Finance.
Sanjay Chaturvedi, chief executive officer, Shubham Housing Development Finance Co. Ltd, a Delhi-based HFC, added that the recent events have made investors anxious and these could lead to the cost of funding rising further. “Given the recent developments, one could expect it (cost of funding) to go up by another 20-25bps."
While certain actions by regulators and a few large non-bank lenders, such as selling off assets to raise liquidity, have helped control the crisis, a wider resolution of the sector’s issues is still some time away, feel industry participants.
“Tighter regulatory oversight and asset sales have staved off the worst of the problems afflicting India’s non-bank financial firms following last year’s defaults by IL&FS. Even so, it will be another 12-18 months before the liquidity issues in the wider sector are resolved," said HDFC Bank Ltd’s managing director Aditya Puri, in an interview with Bloomberg in Mumbai on Thursday.
According to Sanjay Agarwal, senior director at CARE Ratings, the individual credit profile of some companies have been affected because of the lack of liquidity from the debt capital markets, even though, generally, the quality of assets originated and business operations remain robust.
“They face difficulty in arranging fresh funding and refinancing of maturing liabilities. Subject to risk of idiosyncratic events, the players in the industry are now working on tackling the problems in a more individualist manner, depending on the situation of the company concerned," added Agarwal.