NBFC CRISIS – WHAT’S GOING ON?

Really, what exactly is happening in India Inc. For all media reports of its robustness and jumping higher in the Ease of Doing Business rankings, somehow it irks to see this crisis building up. Its more like a huge bubble, it has all the shades of a rainbow, glistening, almost cruelly in the sunlight. But the bubble has become so big that it threatens to burst any time now. Or has it already burst and we are just refusing to accept it, being ostriches burying our heads in the sand, thinking all is well?

The writing on the wall couldn’t be more explicit – the Essel group is on the brink, Dewan Housing or DHFL has defaulted and rating agencies have moved to downgrade it; IL&FS crisis is still emerging like a huge worm out of the decaying can. Eros International too is on the watch. Also who would have ever thought that Jet Airways would be where it is today – grounded! The saga of Anil Ambani continues as he is still unable to offload assets.

So on one hand, we have this crisis in the NBFC sector and on the other, PSU banks continue to walk on thin ice as the NPA situation, with all this happening, could only get worse.

In Q4FY19, based on the earnings reported by the PSU banks, the cumulative operating losses stands at over Rs.50,000 crore and with this situation emerging of more defaults, the crisis-mode is not yet over for PSU banks. Their cumulative Gross NPA has definitely come down at Rs.7.7 lakh crore but what is the assurance that this will not snowball into another huge avalanche of NPA soon?

Thanks to the poor asset quality, PSU banks have been lending at a much lower rate than the private sector banks. Data from RBI shows that cumulative bank credit to companies as well as individuals slowed to 11.9% (YoY), led mainly by personal loans, followed by loans to buy new vehicles while loans to small, micro as well as medium enterprises grew at a snail’s pace.

Bloomberg data shows that of the 39 companies comprising the Nifty, only four were debt free but remaining 35 showed an over 13% (YoY) jump in debt at Rs.16.3 lakh crore – the highest increase since FY14. Of this, 77% of the debt increase by led by Reliance Inds, NTPC, Indian Oil Corp, UPL and Bharti Airtel. Data shows that their combined leverage ratio worsened to 4.1 times from 3.4 times in FY18.

Many are blaming RBI for doing nothing decisive for the NBFC sector when it announced the policy yesterday. But that is merely trying to find someone else to lay the blame on. RBI did the right thing by saying that it will wait and watch and act when required. In the ensuing Press Conference, Governor, Shaktikanta Das said RBI will do everything to maintain sufficient liquidity in the system and said, “ “RBI does not regulate housing finance companies. Nonetheless, banks have significant exposure to HFCs and RBI in any case has a mandate to look after the financial stability of the entire economy. In this background, RBI has been closely following the activity, performance and developments in the NBFC sector.”

Well, in the current scenario, what do you and me, the common people or ‘mango’ people of India do? It would be too drastic to say that you stay away from NBFCs completely. Its better to focus on large NBFCs – those which have maintained high liquidity. Do not depend merely on the strong credit ratings as rating agencies act when the house has already started to burn down. The mid level NBFCs are currently facing a crisis of confidence and the worries range from liquidity to solvency.  NBFCs like Shriram Transport, Bajaj Finance, Mahindra & Mahindra Finance, Shriram City Union Finance, Bajaj Finance and Sundaram Finance are strong, with much better ability to manage the financial markets.

And if it is banks that you prefer at this juncture, ICICI Bank, as mentioned in our Stock Recommendation section is the best bet and SBI too is a  much safer bet for the long term.