Mumbai: After a dismal 2019, the new year brings hope for the NBFC sector with a gradual improvement in demand and the liquidity situation, but a turnaround could take another six months to one year, said reports by top brokerages and rating agencies.
Non-banking finance companies were largely dependent on banks for their financing need while mutual funds as a source had mostly dried up, but things could improve with the government, along with the Reserve Bank of India, actively trying to inject liquidity.
ICICI Securities in an outlook report on NBFCs said, "Calendar year 2019 is destined to be a forgettable year for most NBFCs/HFCs except a few marquee names that outperformed despite the demand slump. While their outperformance was partly due to their brilliant franchises, it was also helped by the relatively low competitive intensity from their peers."
"Calendar year 2020 however brings hope because we expect gradual improvement in both demand uptake and liquidity by mid-2020. This would come on the back of improvement in consumption resulting from all the policy/regulatory interventions made by the government/RBI in 2019," the brokerage said.
Stock price performance year-to-date of the vehicle financiers and the housing financiers was rather poor, except for a few outperformers. This was largely due to tight liquidity leading to lower disbursements, poor volumes from auto original equipment manufacturers (OEMs), and liquidity stress on developers leading to asset quality deterioration in the segment, ICICI Securities said.
In 2019 mutual funds remained risk-averse to the debt papers of NBFCs and housing finance companies (HFCs). "A company rated AA and below still finds it difficult to access debt capital markets. However, we feel this risk aversion to NBFCs peaked out in calendar year 2019. Once demand and consumption come back, we can look forward to more mutual funds lending to NBFCs. Also, with the government really trying hard to make liquidity available to the NBFC/HFC sector, we feel the risk aversion of banks to NBFCs will also gradually reduce through calendar year 2020, it said.
Only the top 25-50 NBFCs were able to manage the liability side pressure; the rest are struggling to raise liquidity in 2019, said a report by Motilal Oswal Financial Services, adding, "In the current period of liquidity squeeze being faced by the NBFCs, banks have been the main source of finance while mutual funds have been very selective."
"This is on account of a few reasons—the debt mutual fund industry's assets under management has shrunk by Rs 2 lakh crore from its peak two years ago, there is a reduction in sectoral caps from 40 per cent to 30 per cent for NBFCs plus HFCs as mandated by Securities and Exchange Board of India, and until recently, there was no clear cut insolvency management framework for financial services companies, making mutual funds hesitant to lend. The situation is likely to persist for a while," analysts at Motilal Oswal said.