The disease of deteriorating non-performing asset (NPA), which haunted the banking sector from 2014, has now passed on to non-banking financial companies (NBFCs). It began with state-run infrastructure giant Infrastructure Leasing & Financial Services' Rs 95,000 crore odd debt was downgraded in September 2018. Then, there were worries from Dewan Housing Finance (DHFL). Earlier this year, the Essel Group debt created a scare for mutual funds and NBFCs and now it is Anil Dhirubhai Ambani Group (ADAG).
The impact of these fragile four groups has been brought out in an interesting report by Ashish Gupta of Credit Suisse. Gupta was the first to detail the NPA mess in the banking sector way back in 2012 with his seminal report titled 'House of Debt'. Since then, his quarterly health tracker of the financial sector is eagerly awaited as the most candid database of the stress in the banking sector. Even the Reserve Bank of India and the North Block rely on Gupta’s reports.
Gupta said it was expected that the situation in NBFCs and bond market will improve after the Reserve Bank of India's measures to release liquidity in the market. “However, what we have seen over the past few months is that while the macro liquidity has improved, there has not been a similar consistency in funding availability to all NBFCs," he added.
The wholesale markets and the domestic corporate bond markets appear to be differentiating between various NBFCs based on their perception of quality or risk on these NBFCs— maybe because of asset side concerns or liability side concerns, he further said.
According to Gupta, the mutual fund industry has the highest exposure to NBFCs. “Our concern is more than just the fact that there are exposures sitting in the books but more so that because of these exposures, because of patchy funding availability the growth for NBFC sector will become a constraint,” Gupta added.
Talking about the fragile four groups, he said, “These four aggregate to roughly around Rs 2 trillion, out of that about Rs 200 billion is with the mutual fund industry which is the main cause of concern because some of the flow getting impacted or this feeding through in terms of liquidity happens via the mutual fund channel.”
“This Rs 200 billion of exposure that mutual funds have is spread across schemes worth nearly Rs 4 trillion, but the point of focus are schemes where these 4 exposures in aggregate are more than 10 percent of the scheme AUM and we estimate that there is about Rs 400 billion of aggregate AUM and schemes where these exposures are more than 10 percent of the scheme AUM,” he added.