On Wednesday, the Reserve Bank of India allowed non-banking financial companies (NBFCs) to raise funds by issuing perpetual debt instruments that can be included in their Tier-I capital. But market players and analysts feel this is unlikely to help NBFCs' brimming cup of woes. "Who will give them perpetual debt now?" asked Axis Bank economist Saugata Bhattacharya.
Consider. The bonds that many NBFCs have bought of real estate companies and SMEs have become illiquid. Not only are banks and mutual funds unwilling to provide funds to NBFCs, these institutions are also finding it difficult to rollover their commercial papers or to issue fresh papers. Barring a handful of large NBFCs that can get support from their parent companies, most companies are facing liquidity crunch, industry sources say. "The business model of NBFCs has been that they buy bonds of real estate companies and SMEs on pretty high interest rates. By itself, it's not a bad model except when there is a 'liquidity crunch,'" says JP Morgan chief economist for India, Jahangir Aziz. RBI has asked for data from NBFCs about their exposure to the real estate and SME sectors, a senior official at a foreign NBFC said. Industry executives say that defaults are on the rise as realty and SMEs are unable to repay their debts. Another key source of funding for NBFCs - fixed maturity plans or FMPs sold by the mutual funds industry-is under Sebi scrutiny. For some schemes, the NBFC exposure is as high as 90% through a variety of issuances. The stock market regulator is taking stock of the asset-liability mismatches and concentration of investments. Sebi officials indicate that reporting norms would be tweaked soon and investment norms rationalised. This would mean funds will have to pare their exposure to NBFCs, aggravating their cash crunch. Sources confirmed that in some cases, the parent company has bought the bond papers of the NBFCs to provide them immediate liquidity. And the firms that have little cash to lend are asking for substantial collateral. Indeed, a Delhi-based NBFC, an arm of a large brokerage firm, has recently loaned about Rs 800 crore to a leading real estate company at 24% interest rate after obtaining almost four times collaterals, a source said. A rapid slide in stock prices also means that NBFCs would find it tough to recover their dues. What also make NBFCs risky is that their funding is mostly short term while their assets are long term. This means funds become scarce when a sudden redemption pressure arrives and the investment holdings become illiquid. Many NBFCs have asked the government for liquidity support and officials say the government is considering tweaking the prudential norms for NBFCs. This could mean banks may be allowed to have a larger exposure to NBFC bonds. Currently, a bank cannot lend more than 10% of its capital funds to a single NBFC. This cap stands at 15% for asset financing NBFC. But market players feel that even if the guidelines are eased, banks may not be forthcoming to invest. "Everybody is hoarding liquidity now," a banker said, adding that the risk averseness to lend is making the life of NBFCs tough. The current crisis has also raised a larger policy debate on regulations of NBFCs. "Banks and NBFCs perform largely the same function but norms governing them are different. There is now a call for making the regulation institution-independent," said Rajesh Chakrabarti, assistant professor, finance, Indian School of Business. Arguing for a level-playing field in regulatory treatment, the Raghuram Rajan panel on financial sector reforms had stressed that "the more an NBFC approaches the characteristics of a bank by issuing short-term deposits, the greater should be the similarity in treatment." Although NBFCs account for a mere 2% of the Indian credit market, as per RBI data, their potential to damage other financial institutions makes them systemically vulnerable. A non-deposit taking NBFC with an asset size of at least Rs 100 crore is considered as a systemically important entity, and is required to maintain a capital adequacy of 10%. http://www.financialexpress.com/news/no-relief-in-sight-for-nbfcs/379580/ Rich get experience. Experienced get rich. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
