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Business News/ Industry / Banking/  Weaker non-banks find it tough to raise debt even as moratorium eludes
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Weaker non-banks find it tough to raise debt even as moratorium eludes

Experts said smaller and weaker NBFCs have either not been able to raise money or have had to settle for less at higher rates
  • NBFC funding market has been improving since February but the covid-19 pandemic and Yes Bank bailout have raised costs for these firms
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    MUMBAI: Smaller and weaker non-bank financiers face more difficulty in raising debt compared to their peers with stronger parentage as risk aversion intensifies amid the covid-19 crisis.

    The covid-19 pandemic has affected the funding of most non-banking financial companies (NBFCs) with bond spreads over the three-year government securities rising by another 50-70 basis points (bps), against the 250-300 bps existing spread.

    Spreads indicate the difference between yield of a particular bond and yield on the government securities (Gsec), with same maturity.

    Experts said smaller and weaker non-bank financiers have either not been able to raise money or have had to settle for less at a higher rate. For instance, Aadhar Housing Finance Ltd and IndoStar Capital Finance Ltd informally tested the waters in the last few months but decided against resorting to bond markets owing to tepid investor interest. IndoStar recently raised 1,225 crore from Brookfield, but in equity capital.

    While IndoStar declined to comment, an email sent to Aadhar Housing remained unanswered till the time of press.

    Ajay Manglunia, managing director (MD) and head at JM Financial Products Ltd said spreads have widened for all non-banks since the onset of the coronavirus-led national lockdown, instead of contracting despite the flow of liquidity.

    “Although there has been a surge in liquidity after RBI’s (Reserve Bank of India) measures, the spreads have gone up for non-banks. Stronger ones are still being preferred by the bank and weaker NBFCs and housing finance companies (HFCs) where there has been rating downgrades, the scenario is worse. The market is fearful about leverage and unsure about how covid-19 is likely to impact cashflows," said Manglunia.

    According to a report by Credit Suisse, NBFC funding market has been improving since February but events like the covid-19 pandemic and Yes Bank bailout have again resulted in an increase in funding costs for the sector. The report pointed out that since the Yes Bank crisis, spreads for NBFCs in the bond market have gone up by at least 90-200 bps.

    However, the increase in spread does not mean the cost of capital has gone up because the Gsec yield has also declined. It indicates the risk assessment of investors, still wary of these smaller lenders’ ability to repay. The yield on the 10-year benchmark bond has dropped by 45 bps since the beginning of the lockdown, closing at 5.77% on Monday. Similarly, the yield on the five-year government bond has fallen 91 bps in the same period.

    The problem for NBFCs also rise from the fact that banks have been very selective in granting the three-six-month moratorium, though their customers have availed it. This has led to concerns over asset-liability problems for non-bank financiers who have not been granted the deferment.

    “Some 10-23% of borrowings for NBFCs are due for maturity over the next six months (April-September 2020). With 30-75% of loans under moratorium, loan book repayments would now be sharply lower until 31 August," said the Credit Suisse report. Consequently, NBFCs would have to dip into their cash balances (5-16% of their balance sheets) to meet repayment obligations and avoid defaults, it added.

    Arvind Chari, head-fixed income and alternatives, Quantum Advisors Pvt Ltd said the market is clearly differentiating between well-run NBFCs, good promoter backing and safer segments.

    “Weaker ones are either not able to raise money at all or are able to raise money at a higher rate and in small amounts. The covid-19 situation has just compounded all of this," said Chari.

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    ABOUT THE AUTHOR
    Shayan Ghosh
    Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
    Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 02 Jun 2020, 09:45 AM IST
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