November 20 2018
There is unprecedented panic over NBFCs’ liquidity
15 October 2018

Cost of funds, on a weighted average basis, seems to have increased by 30-40 basis points, says the IIFL Group chairman

The IL&FS debacle has raised the cost of funds for non banking financial companies (NBFCs) by 30-40 basis points, says Nirmal Jain, founder and chairman, IIFL Group which derives almost 60% of its revenues from its NBFC entity. There will be a much more impact on activities such as loans against shares and real estate funding than compared to consumer lending, he says. Edited excerpts:

Will banks and mutual funds be reluctant to lend to NBFCs due to IL&FS crisis ?

There has been an unprecedented, widespread panic over NBFCs’ liquidity/solvency position although no NBFC other than IL&FS has actually defaulted or even shown any liquidity stress. The impact of panic has been dissimilar on banks and mutual funds. For mutual funds, the panic has spread to corporates who are large investors in liquid funds. We hear that these corporates with surplus liquidity are questioning mutual funds on their exposure to NBFCs and also about quality of companies in the funds’ portfolios.

I think this may result in polarisation of NBFCs that mutual funds lend to and do not lend to, at least in the short term. Banks have a different process for lending and buying securitised assets. For lending, they have their internal credit assessment of the borrowing entity. For purchasing securitised assets, their diligence is more focussed on quality of assets and credit underwriting they are buying. While they have liquidity, one has to watch for sectoral exposure limits for NBFCs.

Will loan growth be hit due to this? Also, how much has the cost of funds increased in the last one month? Will it rise further?

It is too early to say how much loan growth will be impacted because of this. Also the impact will be varied for different segments. For instance, I would expect a much accentuated slow down in loan against shares, real estate funding and much lesser impact on consumer lending. Cost of funds on a weighted average basis seems to have increased by 30-40 basis points in the wake of this liquidity scare. I think the rates have stabilised for the time being. It is difficult to predict interest rate over next few months as it would depend on interplay of several factors, including oil prices, government spending, investor sentiment, U.S. bond yield, RBI stance etc.

How do you see the SBI decision’s to almost triple its loan purchase from NBFCs?

It is a win-win for SBI and NBFCs. As NBFCs try and manage their liquidity profile better, they would be willing to sell assets at higher yield and the bank can acquire priority sector and retail assets.

Stock market has been seeing a lot of volatility in the last one month. What are the key reasons for the volatility? At what levels will it stabilise?

The key reasons are crude oil price spike, hardening U.S. bond yield, IL&FS default, liquidity panic, worsening macro indicators, China slowdown fear etc. I think, for next quarter or two, we should be prepared to live with huge volatility in stock as well as debt markets. Market seems to have some semblance of stability but we need to watch how long it sustains.

With rupee touching new lows , what impact will it have on FIIs in India.

While in the current month, FPIs have sold ₹14,000 crore in equity markets, similar amount has been bought by local funds and institutions. Currency is the most important variable foreign investors are wary of. Rupee will find strong support at ₹75 to a U.S. dollar. If it stabilised around ₹74-75, we should expect foreign investors confidence coming back.

IIFL Group will be demerged into three separate listed entities. What was the trigger and what will be the benefits of having three companies?

Across the world, regulators and investors are favouring corporate structures to change from control-oriented, close-knit conglomerates to innovation and idea-driven independent enterprises. Incumbent players are being challenged by new entrants like never before. The reorganisation will prepare IIFL Group companies for the growth opportunities amidst intensifying competition in coming decade. Also, a clean corporate structure with no cross-holdings will ensure transparency, highest governance standards and compliance. By separating them, we will allow them to grow to their full potential.



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