InvestorQ : What are the major challenges that companies like Dewan Housing and Indiabulls Finance are facing today?
Arya Nanda made post

What are the major challenges that companies like Dewan Housing and Indiabulls Finance are facing today?

Deepa Salunkhe answered.
2 years ago

While each NBFC has its own set of problems, there are some common problems that you can look at. Consider these.

· Firstly, there are some serious questions on asset quality. It first came to light when the IL&FS fiasco first broke out last year in mid 2018. Most of the NBFCs had a huge exposure to IL&FS debt paper. It opened a Pandora Box because most NBFC had lent to the real estate and the infrastructure sector in a big way. These long term loans were stuck and illiquid. Most of these loans had a maturity mismatch because NBFCs were funding these loans by borrowing at the short end via CPs and lending the same to real estate projects at the mid to long end.

· The bigger worry is that higher fuel prices, weaker dollar and the trade war could hit the SME sector badly. NBFCs are among the major lenders to the SME sector. This would mean defaults by SMES, which have been a traditional market for NBFC lending. This debate is likely to come back time and again to haunt us in the next few months.

· The biggest question they face is where will they borrow from? Already we have seen that mutual funds are becoming wary of investing in NBFC debt paper after the experience of IL&FS and DHFL. The big challenge for the NBFC therefore is now about fund raising. They need a constant access to low cost funds to sustain their lending business. If the momentum is lost then overheads and size start becoming a constraint for the NBFCs.

· To add to the problems above, there are bigger challenges that NBFCs are currently facing and it begins with the rise in the cost of funds. Although the interest rates are down, the cost of funds for NBFCs has not come down proportionately. That is making borrowing costlier even at the short end of the yield curve. Secondly, considering their recent problems, most existing investors are unable to find liquidity in the markets. That is forcing some of these mutual funds and other institutional holders of NBFC bonds to sell bonds at yields as high as 12-14%. Lastly, investors are worried about a credit downgrade backlash on NBFCs. That could mean huge write-offs for investors. For now the taps are surely running dry!

· NBFCs also need to worry about tighter regulation from RBI and that is likely to come back to haunt these NBFCs in the months to come. That trend has already started and will only get more acute in the months to come. The biggest worry is that IL&FS fiasco may force the RBI to regulate NBFCs as stringently as the banks.

· Tighter regulation would mean stricter capital adequacy, asset recognition and NPA provisioning norms. The NBFC crisis of 1998 happened when Dr. Jalan chose to tighten the regulatory screws on NBFCs and the number of NBFCs in India reduced from 40,000 to just 3. The last thing NBFCs want is a repeat of the 1998 squeeze

While the budget has committed funding support, it is only going to be available to the stronger NBFCs and the beleaguered ones may still face problems.