For the last three to four years the best part of the bank portfolios is the exposure to nonbanking financial companies (NBFC), said Rashesh Shah, chairman and CEO, Edelweiss Financial Services.
“In the last 3-4 years, the best part of bank portfolios was exposure to NBFCs, which were growing at 25-30 percent in the last five years,” Shah said.
Watch: NBFCs credit growth to stabilise between 15-18% over next few years, says Rashesh Shah of Edelweiss
“However, going forward NBFCs credit growth will likely stabilise between 15-18 percent, for the next few years, said Shah. Meanwhile, asset quality of NBFCs will remain intact but there will be liability crunch, which could slowdown growth but margins and asset quality will improve,” said Shah.
With regards to the debt markets, he said, "There is always liquidity crunch in the last week of September and March, when a lot of banks and corporates who invest into liquid funds, mutual funds (MF) they withdraw money. So commercial paper (CP) unwinding happens."
"The CP market will be there but will be smaller," he said. "The total CP market for NBFCs, which was around Rs 2.5 lakh crore, will stablilse around Rs 1.5 lakh crore."
Edited Excerpts: You understand all these markets well, is it possible to raise money in the debt market now and will that become possible only if the regulator does something in terms of the line of credit?
I think there are three or four factors we should keep in mind. I do not think the debt markets are closed forever, but we always have a liquidity crunch around the last week of September and last week of March. End of half year and end of the fiscal year are always liquidity tight period where a lot of corporates and banks who invest into liquid funds, and mutual funds (MF), they withdraw money.
So there is always commercial paper (CP) unwinding that goes on. Obviously, that has got exaggerated because of the recent event.
I do think that the CP market will be there, but will be much smaller. If you look at currently, the total CP market for NBFCs is about Rs 2.5 lakh crore. I think it will stablilse at about Rs 1.5 lakh crore or so if you look at a lot of the steady-state liquid fund data and all. I think it will be there but not to the same scale it was there.
Also, I think most of the people use CP. We use CP but only with a backup of undrawn lines because every quarter, every half year, you redeem your CP and use the bank lines and you use a combination of these two and that will also continue I guess.
Yesterday I was asking people exactly this after all CP is drawn from your credit lines, carved out of it. However, there were a few debt market traders saying that banks are unwilling to lend and that could be because they are competing with the housing finance companies at least, also with NBFCs in the same space. Are you noticing this hesitation on the part of banks?
No, in the last three to four years, the best part of the bank’s portfolio has been their exposure to NBFCs. In fact, there is almost zero NPAs on banks giving loans to NBFCs across the board.
Also remember, at a structural level, this is a very important part that a lot of people have not appreciated, that banks give a loan to NBFC, let us say Rs 1,000 crore loan, banks will keep aside Rs 100 crore of equity for that.
Now that NBFC, when they give Rs 1,000 crore loan to their housing finance customers, they also keep another Rs 130-140 crore equity aside. So, at a systemic level, Rs 1,000 crore credit is actually supported by Rs 230-240 crore of equity partly by banks and partly by NBFCs.
Banks giving to NBFCs and they eventually giving loans to customers, there is a lot more equity safety is there and that is why we have never seen a problem on the bank portfolio of NBFCs.
I am not saying safety, I am just saying that the dealers said that banks are hesitating to give those lines in the last one week.
A large part of this is the current upheaval that is going on is because of rumours and all. However, the last five years NBFCs were growing at 25-30 percent a year and banks were growing at 8 percent a year.
Now we are seeing bank credit growth has gone up from 8 percent to about 13-14 percent. I expect NBFCs credit growth will stabilise between 15 percent and 18 percent.
So what you are saying is very true. I think the NBFC growth will get calibrated. After five years of 25-30 percent growth, I think the next few years will be an 18 percent kind of growth for NBFCs. What the equity markets have done is actually quickly recalibrated the growth hypothesis around NBFCs which I think is not incorrect.
What you are saying is that the credit growth of NBFCs will moderate from 25-30 percent that we enjoyed in the last five years to 15-18 percent going ahead, but the asset quality of NBFCs will remain intact?
We are not seeing asset quality issues. We have not seen even in the last five years where the Indian economy has gone through stressful times. We had GST, we had demonetisation, if you look at the NPA levels of all NBFCs, they have not actually deteriorated, plus in the last three years, most NBFCs have also raised more equity. I do not think there is an asset side issue.
There is a liability crunch that will happen which will slowdown growth. However, along with slowing down growth, I think the margins will improve and the asset quality will also improve going forward.
Why would you say margins will improve, even on the last one week we have actually seen yields go up, I do not know how many NBFCs can push off 1 percentage point in terms of their asset price?
In fact, if you see, today, you take a simple product like the loan against shares, which a lot of brokerage, wealth managers and all do, the interest rates have already gone up by 100-150 basis points on the LAS books. We heard in the last couple of days, a lot of NBFCs on the personal loans and SME loans have already hiked yields by about 100 basis points.I think there is a market demand that is there and whenever there is a supply side constraint, a large part of the portfolio will absorb the higher yield. So, my expectation is that most of the NBFCs will be able to pass on the extra cost very easily. At least our hypothesis is that the NIM competition is not a bigger risk, I think the growth slowdown is a bigger factor.