Year 2020 may not begin on a good note for non-banking financial companies (NBFCs). The tide that went out in September 2018 to reveal a not-so-flattering health of non-bank lenders hasn’t returned yet. In fact, analysts believe that it is unlikely to come back quickly.
Markets are pricing in a not-so-exciting growth of 15-17% in assets under management for the next two years on a compound annual growth rate (CAGR) basis. This compares with an average CAGR of 18-20% for FY16-FY19, according to JM Financial Institutional Securities Ltd.
Even this reduced growth is largely expected to come from stronger and large firms with a balance sheet that hasn’t been ravaged by mistrust.
Banks and even markets are suspicious of NBFCs when it comes to their own credit quality and this mistrust is lurking even today after a year since the Infrastructure Leasing and Financial Services Ltd’s (IL&FS’s) implosion. In the bond market, non-bank lenders having rating below AAA are not entertained even now. “Wholesale debt market differentiation among NBFCs hasn’t eased. Additionally, the spread on short-term funding cost among better-perceived NBFCs and others remains 400 bp despite rising system liquidity surplus," wrote analysts at Credit Suisse Securities (India) Pvt. Ltd in an 11 December note.
To be sure, the differentiation between the good lenders and the bad are stark. For the top five listed non-bank lenders such as Housing Development Finance Corp. Ltd and Bajaj Finance Ltd, borrowing costs have declined to levels seen before IL&FS. For the rest of the bunch, the going is still tough.
It is clear that those non-banks which lend predominantly to real estate are the worst hit. For them to strengthen, the sector they lend to should begin to show signs of recovery.
So which firms would pass the muster with investors next year?
Having burnt their fingers on non-banks that funded real estate developers through ultra-flexible deals, investors would prefer those who are into retail. In short, if you are lending towards consumption, it would mean you are a safe bet for investors.
Will banks warm up to non-bank lenders next year?
Sure, the government has taken a number of steps to sweeten banks into supporting non-bank lenders through funding. The partial guarantee scheme, now extended to a larger population of NBFCs, is expected to prod banks to lend to NBFCs. Even so, many banks have almost exhausted their sectoral limits towards non-banks and have limited headroom to lend.
If 2019 was defined by pain and rising stress, 2020 is expected to be defined by capital. Indeed, NBFCs that find it easier to raise capital will survive. The question is of survival and not of growth any more for non-bank lenders. “The near term is likely to be a period of consolidation; managements have prioritized further diversification of the liability structure, enhancement of tech capabilities, etc. Growth would take a backseat," wrote an analyst at Motilal Oswal Financial Services Ltd.
