Saturday, May 25, 2019

INDIAN NBFC Non Core Sale & New Draft rules are Difficult



Non-Core Assets & Liquidity is going to keep the Indian economy under problem.  The new regulations for NBFC are going to be a tough job. They will not find the high liquid assets (HQLA) component to maintaining the Liquidity Coverage Ratio (LCR). Most of the AMC have complicated assets involved within their system. These assets are long term nature and less of short term nature. 

They have to cut down on bad assets and in many cases might have to take hit on the books. Remember where Banks faced problem-related to lending that is the place where NBFC penetrated and hence the quality of checks were ignored in most cases and linnet policies and measures were followed.  These investments will pose the biggest risk. For example, one Housing Finance company gives loans to Mumbai real estate segment where OC is not available.  In other words where banks reject to give loan them.

Most of the NBFC has ventured into non-core business as a part of diversification and this is the place where exiting those businesses will be challenging.  Around Rs.15000 cr to Rs.20000cr non-core asset is being held by these NBFCs. Promoters of most of the NBFC have pledged deals which take this number too high. Most of the NBFC shifted from the core business to enhance returns from investments. These investments length and non-disclosure in proper terms are the real problems behind the industry. RBI is very clear that it wants these NBFC to get back on the track by selling noncore assets and this is the reason why RBI does not want to inject liquidity.

Starting April 2020, NBFCs will have to maintain a minimum of 60% of LCR as highly liquid assets which will be increased in a calibrated manner to 100% by April 2024. Well 1-year time frame for 60 % itself is going to be a problem since most of the NBFC books size is so big that to have liquid assets component to maintain the Liquidity Coverage Ratio (LCR) is going to be a nightmare.

But I find that this step will be another failure since the existing the asset-liability management (ALM) have not been followed and only when the crisis of the IL&FS came to limelight the trigger of ALM checking came into the picture.

All the NBFC have intricate intra-group fund transfers and have been involved in the diversification of funding. The AAA ratings are just junk of paper rating and have now worth when the collapse of the Financial Company happens. The ratings have no value during the PRE 2008 the financial crisis and even after 11 years they still in the same place. For a common investor, the risk of investments is calculated based on the rating of the paper. If the same rating is just junk then where does the investor stand at that time? This is the most common situation for an investor.

The biggest challenge and where the government will have negligible scope to play is injecting liquidity. NBFC plays a pivotal role in terms of the consumption economy within India. The rural market consumption will slow down which will impact the manufacturing industry and also long term investments. Trade and business are already facing the heat of Trade war which is impacting the exports.   

Low banking penetration in the last couple of years have given immense growth to NBFC and the same NBFC don’t have liquidity then that will impact growth.  Consumer durable and non-durable both will be impacted. Auto industry and all those industries which are linked to borrowed consumption will face major setbacks.

NBFC needs funding or rather make Banks free up its arms to lend and increase the retail lending arm so that the economy keeps going. The only aggressive approach by the Banks till full confidence is built on the NBFC side will help Indian GDP to grow.

Who will buy the Noncore assets of NBFC? Selling them will not be easy.

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