What Experts Have To Say About Twin NBFC Lifelines

The twin measures for one-time partial credit guarantee and on-lending for priority sector will largely benefit the retail loans business of NBFCs, lead to their faster growth and ease the liquidity crunch, according to analysts, bankers and chiefs of other financial institutions BloombergQuint spoke with.

The finance ministry on Tuesday issued guidelines to offer partial credit guarantee to state-owned lenders purchasing high-rated pooled assets of non-bank financial companies worth Rs 1 lakh crore. In another move, the Reserve Bank of India issued fresh norms that will allow banks to increase their exposure to NBFCs by permitting on-lending for the priority sector.

Here’s what sector experts have to say:

One-Time Partial Credit Guarantee

What does it mean: A one-time six-month partial credit guarantee to public sector banks for first loss of up to 10 percent on high-rated pooled assets of NBFCs. Individual asset size in the pool to be capped at Rs 5 crore. That rules out big-ticket loans, such as developer and corporate loans. Small-ticket loans, such as retail loans (home, vehicle, consumer, etc.) and loan against property would be eligible. The pool of assets should have a minimum rating of ‘AA’ or equivalent.

What experts say:

Nirmal Bang

Retail-focused NBFCs, or retail businesses of NBFCs, stand to benefit. Construction finance and other forms of wholesale financing are not covered under the one-time partial credit guarantee scheme, the brokerage said.

Some of the retail-focused NBFCs are Shriram Transport Finance Co. Ltd., Shriram City Union Finance Ltd., Mahindra & Mahindra Financial Services Ltd., Cholamandalam Investment & Finance Co. Ltd. and Magma Fincorp Ltd., among others.

Some NBFCs and housing finance companies that are present in both retail and wholesale segments include Indiabulls Housing Finance Ltd., JM Financial Ltd. and Edelweiss Financial Services Ltd., among others.

Morgan Stanley

“While this scheme could support stressed NBFCs/housing finance companies, we prefer beaten-down stocks where business is not structurally challenged like Shriram Transport and M&M Financial, or where there is a remedial business model like Edelweiss,” it said in a note.

Union Bank

“In the current scenario, it augurs well for all as it provides much needed liquidity to NBFCs/housing finance companies, option to repurchase, saves them from distress sale, and gives public sector banks an opportunity to acquire capital-light, low-risk, rated asset portfolio with first default guarantee up to 24 months,” Arun Tiwari, chairman and managing director at Union Bank of India, told BloombergQuint.

“Small businesses and consumers get the much-needed lifeline. In a way it is an intent to revive the economy,” he added.

Magma Fincorp

“The recent steps to support NBFCs by way of changing priority sector classification and pool purchases raise expectations of normal liquidity returning to the sector sooner than later,” Kailash Baheti, chief financial officer at Magma Fincorp, told BloombergQuint in an email.

Shriram Transport Finance

“The one-time partial guarantee facility is not something new for us as we have been doing securitisation since years. So, it will be a normal course of business for us,” Umesh Revankar, managing director and chief executive officer of Shriram Transport Finance, told BloombergQuint.

On-Lending For Priority Sector

What does it mean: Bank credit to registered NBFCs for on-lending to agriculture, housing, and micro, small and medium enterprises will be eligible for classification as priority sector up to a stipulated limit. Agri loans up to Rs 10 lakh, MSME loans up to Rs 20 lakh and housing loans up to Rs 20 lakh are eliglible.

The classification, however, applies only to fresh loans sanctioned by NBFCs out of bank borrowings. On-lending will be allowed up to a limit of 5 percent of individual bank’s total priority sector lending.

What experts say:

Antique Broking

Fresh bank loans to all NBFCs involved in commercial vehicles, small ticket loans against properties, gold loans and unsecured business loans, among others, may qualify.

Well-run NBFCs like Bajaj Finance Ltd., Cholamandalam, Shriram, M&M Financial Services, Muthoot Finance, Manappuram Finance Ltd., Can Fin Homes Ltd. and Repco Home Finance Ltd., among others, should benefit.

NBFCs like Housing Development Finance Corporation Ltd., PNB Housing Finance Ltd., Piramal, Edelweiss, etc., may only benefit little as they are largely involved in large ticket loans in developer, loan against property and housing segment.

Shriram Transport Finance

“It will reduce our cost of funds and help us grow faster. What used to happen earlier was that banks were buying our securitised assets to meet the priority sector norms, but that used to cause considerable delay as we had to hold the asset for a couple of months before securitising it. This guideline used to be there prior to 2011, now it has been reinstated,” Revarkar said.

Morgan Stanley

This will bring down risk premiums and funding costs for better perceived NBFCs like Shriram Transport Finance with a large proportion of qualifying loans, where banks will be comfortable taking balance sheet risk, it said in a note.