NBFCs get liquidity cushion
Systemic risks to banks, financiers persist despite RBI measures

In a fire-fighting mode, the central bank has taken more steps last Friday to ease the liquidity situation, especially for cash-strapped non-banking finance companies (NBFCs).

The liquidity coverage ratio (LCR) requirements have been eased to the proportion of incremental NBFC exposure and sector exposure limits have also been raised, until December 31, 2019.

Though a bit late, the Reserve Bank of India’s steps have given a much-needed breather for NBFCs. Still, the lack of confidence among market participants, or lenders, would weigh in on NBFC stocks for a while, says a report.

As per the RBI circular, banks will now be permitted to reckon government securities held by them up to an amount equal to their incremental outstanding credit to NBFCs and housing finance companies (HFCs), over and above the credit to NBFCs and HFCs outstanding on their books as of October 19, 2018, limited to 0.5 per cent of the bank’s net demand and time liabilities (NDTL). Further, sector exposure limits for NBFCs that do not finance infrastructure have been increased to 15 per cent of capital funds from 10 per cent earlier. Both these measures are available up to December 31, 2018.

“We believe that a 0.5 per cent (of banks’ NDTL) easing in LCR requirement will ease liquidity in the quantum of Rs 60,000 crore. Further, a 5 per cent (of capital funds) increase in sector exposure limits may potentially introduce additional liquidity to the extent of Rs 2 lakh crore for NBFCs. We expect liquidity easing to be capped to the extent of LCR at Rs 60,000 crore,” says a report from Emkay Global Financial Services. These measures, the report says, are more relevant for private banks than PSU banks. But the dilemma is that private banks have capital but no liquidity, whereas PSU banks have liquidity but no capital. However, the easing of LCR requirements and higher sector limits should encourage private banks to lend more to NBFCs than now.

The report says the RBI measures have not reduced the systemic risks exist for both banks and NBFCs. In the scenario of a liquidity crunch leading to defaults in the NBFC space, there will be a spillover effect on banks. Bank non-performing assets (NPAs) would rise significantly given the exposure levels to NBFC credit. (see table). Private banks are especially more vulnerable–as a cascading impact on asset quality will lead to growth constraints irrespective of their strong capital position.

The brokerage says, with probable risk of default weighing over stock prices, it is staying extra cautious on developer financiers. “The current turmoil on the liquidity front coupled with the recent ratings downgrade of Supertech Developers due to a delay in loan repayments is having a rub-off effect on developer financiers. We would remain cautious on HFCs/NBFCs with significant exposure to developer finance until the situation resolves itself. We do not believe that the RBI will allow NBFCs to go bust,” says the report.

Both measures clubbed together would go a long way in resolving the temporary liquidity crisis for NBFCs.

The brokerage says it will stick to quality names with better asset liability management profiles, granular retail book, and adequately capitalised NBFCs, so prefers Bajaj Finance, HDFC, Cholamandalam Finance and M&M Finance in the space.