RBI’s Proposed Liquidity Norms For NBFCs: Short-Term Pain For Long-Term Gain
The proposed rules imply that the NBFCs will have to compete with bank on cost, efficiency, agility and niche focus.
The Reserve Bank of India’s proposed measures to tighten the liquidity framework is likely to weigh on margins of the non-bank finance lenders, according to brokerages.
The central bank released a draft circular on Friday that sought to revise the extant guidelines on liquidity risk management for NBFCs. It proposed to introduce Liquidity Coverage Ratio for the lenders with an asset size of Rs 5,000 crore and above to ensure buffer in times of stress. (More details here)
The need to hold high-quality liquid assets covering 30 days of net outflows is likely to be a major drag on margins for the NBFCs, SBICAP Securities Analyst Avinash Singh wrote in a note. “The recommendations, once finalised, will reduce regulatory arbitrage between banks and NBFCs.”
Singh said the proposed rules imply that the NBFCs will have to compete with banks on cost, efficiency, agility and niche focus. “Well-capitalised banks to gain market share as NBFCs will exit from selective segments or moderate pace of growth faced by pricing pressure.”
In order to maintain the liquidity coverage ratio, the NBFCs will have to park their money in low-yielding assets, Siddharth Purohit, research analyst at SMC Institutional Equities told BloombergQuint.
However, Purohit added the big change would not impact everyone in the same way. The top or well-managed NBFCs such as Bajaj Finance and Cholamandalam Investment and Finance Company would not have much impact, according to him.
Here’s what other brokerages have to say:
CLSA
- Tighter liquidity norms to put pressure on margins/growth.
- NBFCs with asset liability management gaps, lower ratings, and higher funding cost are worse off.
- Negative spreads on G-Secs can be in a wide 200-400 basis points range.
- HDFC remains our top pick in this space.
Investec
- Guidelines cover majority of listed NBFCs; National Housing Bank likely to follow.
- Guidelines to strengthen ALM and improve stakeholders’ confidence in the sector.
- See minor impact on NBFC’s profitability – less than 5 percent of net profit.
- Select NBFCs will have to increase liquidity to comply with liquidity coverage ratio requirements.
Industry View
While most NBFCs welcomed the proposed norms as long-term positive, they anticipate pain in the short-term. “The problem will be the cost of compliance because there are many principles [in the RBI’s proposed rules] that are difficult to follow. The cost of compliance will be high,” Chennai-based Repco Home Finance’s CEO Yashpal Gupta told BloombergQuint.
But Gagan Banga, vice chairman and managing director of Indiabulls Housing Finance sees light at the end of the tunnel. “Those of us who will be able to walk this path will land up creating long-term value,” he said.
He said appropriate structured public disclosures are extremely important. "It has to be tighter supervision all the way through the rest of our existence."
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