PE capital infusion to NBFCs
Mahesh Singhi

In India’s mission to achieve economic growth and financial inclusion, NBFCs have been playing a significant role by offering credit to the people in the underserved and unbanked regions. The sectoral outlook of NBFC was quite bullish in the recent past. However, the IL&FS saga has of late changed the optimism-led scenario altogether. The listed NBFCs witnessed a sizeable erosion of market value. Asset-liability mismatch, liquidity crunch and limitations to seek higher short-term borrowing have put up some obstacles on the growth path of the NBFCs.

The IL&FS imbroglio has put mutual funds and banks on a risk-averse mode and that development has dried up the source of funding to a great extent for the NBFCs. As a result of that, valuation expectations of the sector have also moderated. As per reports, in August, liquidity in the banking system had a surplus of Rs 20,200 crore. However, it turned to a deficit of Rs 1.16 lakh crore at the end of October. The risk-averse mode adopted by the banks and mutual funds has consequentially raised the cost of capital.

Meanwhile, as a definite fallout from the series of developments after the IL&FS fiasco, the short-term commercial paper (CP) rates have also gone up by 1-1.5 per cent on the back of RBI increasing repo-rate by 50 bps.

However, the scenario has opened up an investment-route for the private equity (PE) funds to the NBFC sector. NBFCs are also approaching PE funds to raise capital. As per the latest reports, the NBFCs in the country have managed to attract PE investment to the tune of $2.041 billion in the January-November 2018 period – a gigantic 88 per cent increase in comparison to the investment attracted by the NBFCs in the entire calendar year of 2017. The PE investment in 2018 is the highest in four years.

According to the norm, if the CP rate goes up, NBFCs will end up paying more interest on the funds they raise. All in all, it is quite evident from the findings that the prevailing market scenario presents lucrative opportunities to the PE funds to go for outright acquisitions of NBFCs. PE funds aiming to ride the credit-fuelled consumption in India are seriously looking at the options to acquire some growth-oriented NBFCs. If TPG growth’s equity investment in Ess Kay Fincorp, KKR & Co’s keenness to acquire stressed assets of NBFCs are any indication, the trend is flourishing.

The key here for the PE funds is to identify those NBFCs having the wherewithal to expand their lending operations to small and medium enterprises. The fact is that the credit access in the country still remains under-penetrated and without access to credit, the SME and MSME sector will not be able to grow. With the window of investment opportunities emerging from the IL&FS saga, PE players are trying to capitalise on them.

Having said that, NBFCs with strong financials are likely to raise money from the debt markets. But, the NBFCs with not-so-strong financials may have to be content with raising equity at discounted valuations. The market has been concerned about asset-liability mismatches (ALM). In a rising interest rate scenario and at a time when NBFCs are not able to raise adequate funds as required, PE can play a significant role to allay rising concerns.

One shouldn’t forget that a PE firm not only brings liquidity to NBFCs. Post-acquisition, an NBFC can leverage the experience and know-how of the PE firm to penetrate into new markets, innovate new products and services, enhance operational efficiencies and improve corporate governance. Capital infusion from PE to the NBFCs always augurs well with the economy of the country.

The writer is founder & MD, Singhi Advisors