In the Coming 6-12 months, Major NBFCs may tap Equity Markets

An Overview of Top NBFCs’ Strategy

In the next six months or even one year, many other non-banking financial companies (NBFCs) are expected to lift stocks to access robust markets for money. NBFCs can scout for funds through a variety of paths, including initial public offers (IPOs), capital markets (QIPs) and commercial foreign bonds (ECBs).

Some non-banks that are also planning to raise money from the market include HDB Financial Services Ltd, the HDFC Bank Ltd Unit, the Motilal Oswal Home Finance Ltd, the Motilal Oswal Financial Services Ltd Unit, Hero Fincorp, Hero MotoCorp Ltd Financial Arm, and the Ugro capital technology lender.

“The tentative capital infusion that NBFCs need this year is up to $3-4 billion, and while 70% is due, maybe $1-1.5 billion would come from equity,” says Dinesh Arora, PwC India’s leading dealer. “Most NBFCs plan to raise capital on the equity route over the coming 6-12 months. This could be through QIPs, IPOs or private equity. Those that can’t lift these strategies can consolidate, but it takes time and companies are going to try to increase equities,” he said.

Further Key Takeaways

NBFCs have an average of 19-25% of their capital adequacy ratio, a capital buffer that means financial flexibility for a financial service company, compared with regulatory requirements of 15%. But liquidity can be increased and the emerging credit demand that many non-banks are trying to exploit the market can be sustained.

The fund raising is expected because markets, in particular the IPO, are good and many other ways of raising funds are not possible. There are already exaggerated secondary markets so now is a good time to take advantage of (the primary markets). This comes at a time when NBFC growth has been struck by the liquidity decline of banks and financial institutions during and even before the pandemic.

RBI’s Report

The consolidated balances of the NBFCs in the second and third quarters of FY21 increased slowly in recent RBI data compared to their corresponding FY20 quarters. In its May 2021 newsletter published earlier this week RBI stated that the balance sheets of NBFCs grew by 13 percent from Q2 and Q3 by 11.6 percent. Over the past few years the business growth slowed by 15-20 per cent, with more citizens vaccinated once the pandemic is over, demand (for loans) increases.

Liquidity is not an issue for the 100 Top NBFCs as they expand, but collect capital from the market. For small and medium-sized NBFCs with AUMs below €500, banks will not lend and will require less capital but will be lower rating in order for growth to occur so they can live. Via the FIDC, smaller NBFCs have written to the central bank, seeking help for liquidity because of the difficulties they face to raise funds.

RBI stated that both asset quality and liquidity can be seen in terms of the pandemic. As a result of regulatory forbearance, the efficiency of NBFCs’ assets has improved in the period 2020-21 compared with Q4FY20. However, in comparison with the same duration in 2019-20 the gross non-performing asset ratio of NBFCs was high in Q1 and Q2FY 21. The momentum is anecdotally greater than ever. Initial worries about recoveries and growing crime, which can interfere with financial firms’ growth.

The fear of a tighter lock-out between the second wave of a pandemic could affect retail credit quality assets, which would affect housing finance companies and NBFCs fund-raising capacity along the securitisation route. Loan securitization is a mechanism in which an equity pool is bundled and sold to investors as financial instruments. Further, NBFCs moved towards longer-term borrowing to handle their asset liability mismatch in line with the tenure of their properties.

NBFCs generally collect a large part of the funds from banks and the collection of deposits from the public by select NBFCs is allowed. Approximately a third of the funds comes from the economy, which includes capital markets, public bids, QIPs, foreign financing and debt instruments. There has steadily been a reduction of the number of NBFCs taking deposits to 64. Six were not allowed to accept additional deposits. As of January 31, 2021, 9,507 NBFCs had been registered with the Reserve Bank.