By Gaurav Kumar

The 2018 IL&FS default came as a significant blow to the Indian financial ecosystem, leading to a massive credit crisis and wider sectoral worries across the country. The debacle shattered investors’ trust in NBFCs, eventually leading to the curtailment of their lending activity. This pushed NBFCs to either cut back on new disbursements or explore alternate avenues for fund raising including selling down their assets.

The origination of the crisis and its impact on NBFCs and HFCs
Between 2014-15 and 2018-19, most businesses increasingly availed commercial credit to bank on the growth opportunities that were present at that point of time. During this growth phase; most NBFC and HFCs availed funds from commercial paper and NCD market regularly on account of availability of attractive rates Amid this credit offtake, some NBFC lenders overlooked borrowers’ creditworthiness, their intentions and, of course, their ability to repay.

Post IL& FS default; the investor sentiment towards NBFCs and HFCs have soured and this has caused asset-liability mismatch in these companies which has inadvertently affected credit offtake in multiple segments. With cautiousness among lenders rising, even NBFCs and HFCs which were financially sound had to borrow money at higher interest rates. This liquidity crisis left NBFCs and HFCs with no choice but to seek access to the securitization and direct assignment market to meet their liability and obligations .

How securitization and direct assignments (DAs) helped?
During the same period, NBFCs and HFCs reached out for financial instruments like securitization and direct assignments (DAs). As they allow borrowers to pay directly from collections against the selling of their loan assets, without increasing the liquidity pressure, such instruments have an inherent mechanism in place to tackle the ALM mismatch. This is why these instruments have become the vehicles helping the NBFC sector to overcome the liquidity crunch.

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Funds raised through these routes have effectively helped NBFCs and HFCs meet sizeable repayment obligations. It is observed that securitization volumes of HFCs snowballed by over 200% from H1 FY 2019 to H2 FY 2019. Securitization volumes in the MSME/LAP sector have also registered an exponential increase of over 835%, despite being on a lower base. June quarter of FY20 has seen the highest securitisation volumes seen in the first quarter of any financial year at INR 50,300 crore and volumes for FY20 is estimated to touch INR 2 trillion (ICRA).

These growth figures show investors’ preference for credit enhancement facilitated by such transactions, as well as borrowers’ willingness to seek credit in the wake of the liquidity crisis.

Our analysis of the pricing of issuances in the market shows that almost all rating categories witnessed a surge in pricing post IL&FS crisis across sectors. This came at a time when the 10-year G sec rates (which could be taken as a proxy for risk free rates) have come down on account of several rate cuts by central bank. While the benchmark rates have continuously slipped; the sharp surge in pricing of these issuances at same rating category; suggests investors charging more premium on account of increased risk spread. The fact that the issuers rushed to these routes; despite increase in the pricing highlights the impact of liquidity squeeze on originators balance sheet.

Policy fillip by the Government
The Government and RBI have been pro-active in creating a positive policy environment to further aide the growth of alternative funding for NBFCs. RBI recently eased up the minimum holding period (MHP) for long tenure loans, which raised the quantum of assets eligible for securitization. The recent announcement in budget regarding providing of first loss partial credit guarantee upto 10% by government to Public sector banks for high quality loan buyouts amounting to Rs 1 lakh crore is further expected to stoke the growth for securitization and direct assignment market.

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Relaxed regulations for raising debts through external commercial borrowings (ECBs) has been another effective instrument that helped NBFCs and HFCs revive liquidity crisis. This included ECBs where foreign borrowing for a tenure greater than 5 years is allowed without full hedge and lowering of the hedge to a minimum 70% of the loan amount with a tenure between three to five years. These corporates, therefore, now have more flexibility to plan for their hedges and make them more cost-effective.

(Gaurav Kumar is Founder and Director, Vivriti Capital.)



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