The Non-Bank Lenders Bracing For A Refinancing Test

According to data from Bloomberg, the top ten NBFCs and HFCs have Rs 91,674 crore in bonds and loans maturing between May and September this year. Of this, Rs 64,794 crore in borrowings is through corporate bonds.

Housing Development and Finance Corporation Ltd. has around Rs 32,000 crore in bonds maturing by September, followed by LIC Housing Finance Ltd. at Rs 15,300 crore, L&T Financial Holdings at over Rs 8,580 crore and Bajaj Finance Ltd. at a little under Rs 8,300 crore.

VS Rangan, executive director of HDFC, in response to an email from BloombergQuint said that “The Corporation has adequate surplus liquidity on its books to meet its debt obligations. Additionally we have access to diversified sources of funds and are not reliant on just one or two segments.”

A spokesperson for PNB Housing Finance Ltd. said the company has maintained sufficient liquidity of Rs 7,588 crore as on March 31, 2020, and has additional sanctioned but undrawn lines of Rs 3,994 crore. “Further the Company is also in the process of drawing down funds from National Housing Bank and Japan International Cooperation Agency that was sanctioned earlier. Additionally, post March 2020, the company received fresh sanction lines of Rs 500 crore from a leading PSU bank,” the spokesperson said.

In an email response, Rajiv Sabharwal, chief executive officer of Tata Capital Financial Services said that the company carries adequate liquidity cover in the form of cash, investments and bank lines to meet all its obligations.

Bajaj Finance declined to comment on upcoming maturities. Emails sent to other firms on Tuesday went unanswered.

Limited Benefit From RBI Measures

NBFCs and HFCs are in tight spot today.

On the one hand, they have had to extend the Reserve Bank of India permitted moratorium to their borrowers till the end of May. On the other hand, liquidity in the corporate bond markets has dried up and bankers have turned more risk-averse.

“Despite the RBI’s efforts to increase liquidity in the bond markets and improve risk appetite at the system level, bond markets continue to stay illiquid and cost of liquidity remains high for NBFCs,” said Motilal Oswal in a April 27 report. It added that risk appetite remains low for private NBFC paper.

Last month, the RBI announced that it would provide Rs 1 lakh crore worth of targeted long-term repo operations funds to be invested in primary and secondary debt markets, through banks.

According to Motilal Oswal, of the Rs 50,000 crore earmarked for primary markets, 52 percent went to bonds of high-rated corporates, 37 percent to state-run NBFCs, infrastructure development funds and development institutes and 11 percent to large private NBFCs.

The RBI announced a second Rs 50,000 crore in such long-term repo operations targeted specifically at non-bank lenders. Only half of that money was raised by banks.

Given the risk aversion, particularly towards the financial sector, non-bank lenders have seen relatively low fresh borrowings.

Rise In Cost of Borrowing

The borrowings that are taking place are coming at a higher cost.

BloombergQuint analysed credit spreads for three-year bonds issued by eight of the top ten non-bank lenders in the past three months and compared it to spreads on bonds issued during the same period last year.

Credit spreads have reduced for Mahindra Finance, Bajaj Finance and LIC Housing Finance compared to a year ago, although they remain elevated. Whereas HDFC, L&T Finance, Tata Capital, Shriram Transport Finance and Aditya Birla Finance have seen wider credit spreads. The credit spread is additional amount sought by investors over government bonds of a similar maturity.

Indiabulls Housing Finance and PNB Housing Finance were excluded as both companies last raised bonds in the first half of 2019.

While individual companies have seen varying changes in borrowing costs, across the sector, spreads have risen.

According to the Bloomberg-FIMMDA Index, yields for AAA-rated NBFCs and AA-rated NBFCs, across the one-year and three-year buckets, shot up last week and have held close to those levels.

“Spreads for most NBFCs were at very attractive levels pre-Covid-19 and were displaced only due to the ongoing situation,” said VS Rangan of HDFC. “They’re likely to stay volatile in the near term, with high quality credits having a disproportionate advantage on account of flight to quality.”

Sabharwal said factors beyond cost of debt are important too. “Credit costs are not purely impacted by cost of debt alone and there are various other factors which are at play as well. While credit spreads for corporate bonds have widened but as and when the economy will regain momentum, sentiments will change,” he said.

According to a research report by Morgan Stanley, only non-bank lenders with strong parentage and funding access have been able to grow their borrowings. Other NBFCs have had to rely heavily on retail asset sell-downs for finance, the report dated April 27 said.

As a result, the share of funding to the sector from mutual funds has reduced while bank borrowings, either through loans or through securitisation, have increased, it said.

Rangan of HDFC agreed that the funding mix is changing.

“Mutual funds are currently facing redemption pressures and are hence not actively participating in most primary issuances. With credit schemes of mutual funds suffering a crisis of confidence and debt schemes seeing larger redemptions, they’re likely to stay conservative for a while,” said Rangan. He added that despite the disruption to bond markets and expectation of higher issuance of government and state government bonds, the demand for high-rated quality corporate issues will hold strong due as investors can earn higher yields.

According to Karthik Srinivasan, group head of financial sector ratings at ICRA Ratings, the current environment may once again make non-bank lenders more reliant on bank funding. “It’s important to note that important market constituents like mutual funds and insurers have scaled down their appetite, which leaves only the banks.”

Alpesh Mehta, deputy head of research, Motilal Oswal Financial Services, said since there are more sellers than buyers for NBFC and corporate bonds today, and there is an expectation of higher flow of government bonds and bonds from state governments, NBFCs would prefer borrowing from banks rather than bond markets.

This story was updated to include comments received from Tata Capital Financial Services.