THE NBFC OPPORTUNITY
NBFCs : A new hope, or hopeless?
The Liquidity crunch, cautious lending by banks and poor primary market conditions have brought forward a great opportunity for NBFCs to jump into the big league and be the saviour for the day when it comes to ensuring the country’s GDP growth gets the much required jump-start. But the question remains, are they ready for the challenge?
Deepak Ranjan Patra
Issue Date - 01/04/2012
Go to Page Number - 1 2 3
Nevertheless, it’s not only the initiatives; NBFCs’ excellence in controlling the quality of assets amid a rapidly growing asset pool has been spot on. Gross NPAs to credit exposure rate (GNPA) for NBFCs came down to 0.7% by March 2011 from 1.3% in 2010. And that was the particular year when loans and advances of NBFCs increased by as much as 9.5% to Rs.779 billion in March 2011from Rs.711 biliion in March 2010. For that matter, from 10.6% in 2001, the gross NPA ratio of NBFCs has declined consistently year after year without a single exception. Interestingly, while NBFCs reduced their GNPA ratio by almost 50% during the previous fiscal, the Indian banking sector struggled to keep its NPAs under check. The same for FY 2011 remained at 2.25%, slightly less than 2.39% a year ago. However, the biggest question remains – with their expertise in certain areas and excellence in operations being marred by environmental conditions and absence of the right policies, can NBFCs take the big leap forward to hold on to the opportunities coming their way and make FY 2012-13 the year to remember for the sector?
With the Eurozone debacle deepening further, there is little doubt that FY 2012-13 will be another year of worries for countries and companies alike, more so in India where the quarter ending December 2011 has already shown signs of trouble with the GDP growth slowing down to 6.1% – the lowest in three years. While industry body Assocham blames it on loss of business confidence due to the acute liquidity crisis that stemmed from European markets, high interest rates to control inflation and rising input costs have further constrained manufacturing. Moreover, the corporate sector on its own is also finding it hard to get going due to a receding bottomline. As a matter of fact, cumulative net profits of BSE 500 companies that witnessed a growth of 20% year-on-year to Rs.2.35 trillion for the nine months ending December 2010 fell by over 14% to Rs.2.022 trillion for the same period in 2011. This certainly calls for a bout of fresh investments to keep the momentum steady. But where are the funds? That, for sure, is one issue heating up most of the boardrooms at present.
Going by boardroom discussions, the options for India Inc. at present could be raising equity from the markets, raising debt through ECBs (the most preferred way for Indian companies to raise funds over the past few years) or borrowing from banks. Talking about the market first; well, even a market novice will provide you with enough reasons on why this is not the ideal route under the prevailing circumstances. High volatility, sunk investor confidence, lack of FII support – they all point to why India Inc. cannot gather enough dough from the market at present. And the boardrooms vouch for it. Since January 2011, as many as 41 initial public offerings (12 since the beginning of 2012) that intended to raise around Rs.378.59 billion from the primary market have been called off. And the list includes names of well known companies like Micromax and Jindal Power to name a few.
A search for alternative ways to fund companies that are already feeling the pinch due to curtailed trade credit in global markets definitely brings in the option of external commercial borrowings (ECBs) to discussion. But in light of the Euro crisis, even that doesn’t look to be in good shape. As Abheek Barua, Chief Economist, HDFC Bank, points out, “…the acute liquidity crisis that stemmed from the European markets and spilled over to domestic markets affected trade credit and affected the supply of ECBs. It threw in certain calculations or investments completely out of whack.” Borrowing on the domestic front, too, is not too easy for the corporate sector at present, more so as the banks have adopted a cautious approach; first to keep a check on rising non-performing assets and second to weather the liquidity crunch. Going by the data that is available with RBI, total credit by scheduled commercial banks to the industry sector (medium and large), which grew at 25.9% y-o-y in March 2011, slowed down to 22.1% y-o-y by mid-November 2011.
This situation, where India Inc. is in serious need of funds and most of its traditional sources are failing to provide any real assistance, is an ideal opportunity for NBFCs to enter the big arena and create a space for themselves in the corporate sector; if not turn out to be their biggest savior. For sure, many would like to argue about a possibility of PE funding. But the fact remains that while PE funding generally comes with an expected return of 25-26% (and that’s apart from PE players’ desire to control the management), the same funds can be arranged from an NBFC at a cost of 18-20%. A straightforward example in this case could be the real estate sector. While the players in this sector used to be more dependent on PE players for funding, the focus has completely shifted in favour of NBFCs over the past few years. As per data available, while PE investment in the real estate sector has fallen thick and fast from $6.7 billion in 2007 to $850 million in 2011, NBFCs have deals worth $580 million in this year despite being late entrants. And it’s expected to grow further in the next year. Undoubtedly, the number of NBFCs operating in this sector has shot up from just about six in 2008 to close to twenty in 2011. Like the realty sector last year, NBFCs definitely have a huge opportunity in the cash-strapped Indian corporate sector now.
The future of NBFCs in India will depend a lot on how skillfully and effectively they exploit this opportunity to grow to the big league. Nevertheless, the current situation will anyway help NBFCs to strengthen their base by providing them quality borrowers and bigger deals. Simultaneously, with bank lending to NBFCs not being considered as priority sector lending anymore, NBFCs can now breathe free and park their money at their will, which will again open many doors for them. Ashok Jainani, Chief Market Strategist, Decision Markets points out that with the industry gearing up to the new opportunity, the sector will undergo some serious changes. He shares with BFM, “Not all NBFCs will be able to pull out a great card in this context. Some, especially the bigger NBFCs, will do great, while the smaller ones will struggle. This, for that matter, will make the industry more polarized. But at the same time, this will help the sector a lot in the long run as players then will be more focused on the segments they want to cater to.”