Business fundamentals of non-banks still look solid

Analysis of the liquidity position of the large non-banks – both non-banking financial companies (NBFCs) and housing finance companies (HFCs) – that Crisil rates shows that they are maintaining adequate liquidity buffer to manage mismatches, if any, in their asset-liability maturity (ALM) profiles.

In an environment where access to funding has become a function of market confidence, the quantum and quality of such liquidity cushion will be the key differentiator. However, the business fundamentals of non-banks – such as growth potential, asset quality and capitalisation – still look solid.

The analysis of ALM profiles of large, rated non-banks reveals the following:

# NBFCs operating in shorter-tenure loan assets such as consumer durables, microfinance, two-wheelers and personal loans are comfortably placed with positive gap in the ‘up to 6 months’ maturity bucket.

This is even without considering unutilised/undrawn bank lines.

# For NBFCs operating in other asset classes such as vehicle finance, small and medium enterprise (SME) loans and loans against property (LAP), some of them reported a negative gap in the ‘up to 6 months’ bucket with the proportion of short-term borrowings (including commercial paper) being the key driver. However, if the liquidity cushion available in the form of unutilised/undrawn bank lines is taken into consideration, the negative gaps turned positive across maturity buckets up to one year.

# Expectedly, HFCs have negative gaps in operating cash flows in most maturity buckets ‘up to 6 months’, which is typical to the business. However, some of the larger HFCs do maintain cash and equivalents to more than offset this mismatch. And, if the unutilised/undrawn bank lines are taken into consideration, other HFCs will also show a positive gap.

Commercial papers (CPs) have become an attractive short-term funding source over time because of attractive pricing and greater acceptability. Between March 2016 and March 2018, the share of CP borrowings in the resource mix of NBFCs increased 500 basis points to 15 per cent, or more than twice 2014 levels. The share of CP borrowings by HFCs was 10 per cent as of March 2018 against 8 per cent in March 2016. At the same time, it is important for NBFCs/HFCs to maintain adequate liquidity cushion to offset the potential risk in CPs, which emanates from high dependence on rollovers and refinancing on maturity. The ability to do so is sensitive to the confidence levels in the market – especially among investors like mutual funds.

Over the past few months, a number of Crisil-rated non-banks have been looking to maintain additional liquidity in the form of cash and equivalents compared with the past. Liquidity backup in the form of cash and equivalents is the best option in an uncertain market since it can be tapped on demand.

Additionally, many non-banks maintain liquidity in the form of unutilised/undrawn bank lines. Here, it is important to have quickly accessible lines that are renewed on a regular basis. Also important is a diversified banker base – especially due to capital constraints faced by a number of public sector banks (including those under RBI prompt corrective action framework) – as it is possible that in some cases drawing down of unutilised/undrawn bank lines may take time.

All these will be the key differentiators over the near-term in an environment where access to funding is likely to remain tight. Nevertheless measures such as the one announced by RBI on the increase in ‘facility to avail liquidity for liquidity coverage ratio’, with effect from October 1, from 11 per cent to 13 per cent of banks’ net demand and time liabilities, should provide support to systemic liquidity.

Crisil will continue to monitor its rated portfolio of NBFCs and HFCs with specific emphasis on their access to funding, both in terms of availability and cost of funds.