NBFC STOCKS FALL ON STRICTER RULE FEAR

Analysts expect growth, margins to come under pressure

The correction in non-banking financial companies (NBFCs) extended on Monday as investors dumped shares fearing that the proposed norms by the Reserve Bank of India (RBI) would impact growth and profitability. The central bank on Friday said it was looking to strengthen norms for NBFCs to avoid rollover risks. It also urged financial firms to reduce their dependence on short-term funding, and instead make use of long-term funding.

Shares of Dewan Housing Finance Corporation (DHFL) tumbled 18.5 per cent, extending its year-to-date (YTD) fall to 61.7 per cent. Edelweiss Financial Services tumbled 13.7 per cent, taking its YTD fall to 49 per cent. JM Financial, Magma Fincorp, and Shriram Transport Finance fell more than 10 per cent each.

CLSA, in a note, said many NBFCs are becoming systemically important and have a higher dependence on short-term sources such as commercial papers and mutual funds. The RBI could extend requirements such as liquidity coverage ratio to NBFCs, which are currently applicable to banks.

Investor sentiment towards the NBFC sector has been weak, following the default by Infrastructure Leasing & Financial Services (IL&FS). The infrastructure finance major’s huge dependence on short-term funding for longgestation projects is seen as the key reason for the crisis.

The RBI has said the new stricter regulations would be aimed at curbing default risks arising from such assetliability mismatch (ALM).

Depending on short-term debt to garner a bigger share of the lending market is a “myopic strategy,” RBI Deputy Governor Viral Acharya had said at the post-policy conference on Friday.

“The RBI said that it would look at measures to strengthen ALM at NBFCs to prevent mismatches. We await details but this could have negative implications for loan spreads and loan growth,” said Morgan Stanley in a note. “Every 1 percentage point shift in mix of borrowings from commercial paper to long term non-convertible debentures (NCDs) or bank borrowings could increase cost of funding by 0.5 to 1 basis points, depending on the credit rating profile.”

The brokerage said investors should prefer large lenders such as HDFC Ltd, who are positioned well in terms of liquidity. Shares of HDFC Ltd fell 2.6 per cent to ~1,670 on Monday.

“With increasing regulatory scrutiny on ALM, we expect NBFCs to ‘normalise’ their borrowing profile — that is migrate from opportunistic funding to more stable and sustainable funding. This would lead to a larger-than-expected increase in cost of funds. We believe this would have a twin impact on both margins and growth. We expect growth to taper for some of the fastest-growing NBFCs,” said Motilal Oswal in a note on Monday.

The brokerage cut earnings estimate for the current and next fiscal year by 4 to 7 per cent for NBFCs. It also lowered the price targets for NBFCs across its coverage universe by 8 to 27 per cent to factor in cut in earnings and higher cost of equity.

JM Financial in a note said strong promoter-backed NBFCs and housing finance companies (HFCs) will get disproportionate share of funding and competition from new and small NBFCs will come down massively.

It said broker-backed NBFCs like Edelweiss and HFCs with ALM mismatch DHFL, PNB Housing, Repco Home Finance will see growth slowdown.