NBFCs' make-or-mar hour is just 9 days away

As thousands of crores come up for redemption, senior officials of close to 20 large non-banking finance companies (NBFCs) and housing finance firms met in Mumbai this week to figure out the road ahead.They fear that another default or failure to roll over commercial paper (CP) — a money market instrument to raise short-term funds — could once again rattle the market where liquidity has dipped with most mutual funds, which have been a ready provider of credit for years, sitting on cash to meet possible redemption pressure from investors.According to a senior official of a Mumbai-based NBFC, about Rs 50,000 crore of CPs are coming up for redemption by November 9. Of this, around Rs 5,000 crore were issued by a troubled housing finance company.At the meeting, held in the office of Tata Capital on Monday, it was decided that the industry would try to marshal support from large industrialists and senior members of the financial markets to move the Reserve Bank of India (RBI).“It’s not just the professionals, we would like to approach the promoters of large corporate groups having interest in financial services companies to seek a meeting with the RBI governor. Some of us have had informal discussions with RBI officials, but we think it would make a difference if business leaders meet Urjit Patel to explain seriousness of the situation,” said a person who attended the meeting. 66438977 “Also, if big names in the corporate world seek an appointment with the governor, chances are he would agree,” the person said.There is a widely shared perception in the industry that the central bank is not fully appreciating the liquidity problem. “May be only a handful of companies are facing a real crisis. But even a single default could spark panic, push mutual fund investors to seek redemption, which would cause the funds to sell top-rated debt papers, and this would pull down many other security prices. So, many MFs are holding a large portion in cash, some NBFCs are prepaying CPs as they are not investing. The bigger challenge is reviving the credit business,” said the chairman of a large financial services group.Housing finance companies are comparatively more dependent on CPs which lower the cost of fund. The total size of HFC industry would be Rs 6 lakh crore against Rs 22 lakh crore for NBFCs.HFC REGULATIONAccording to the person, there is also an element of uncertainty as to what extent RBI would involve if some of the smallor mid-sized HFCs run into a problem.“Technically, HFCs are regulated by the National Housing Bank, which is a refinance institution, and NHB is no longer a subsidiary of the central bank. However, this was not discussed in the meeting,” he said.The participants in Monday’s meeting were members of a FICCI sub-committee.“The situation is slightly better than what it was a fortnight ago. For instance, a Mumbai NBFC raised Rs 1,300 crore of CPs on Tuesday. But stress remains as most mutual funds are investing selectively and credit cycle is not moving,” said an industry source.While RBI has allowed more headroom to banks to lend to NBFCs, most banks — particularly private and foreign banks — are preferring to buy loan portfolios by cherry-picking NBFC assets rather than directly lending to an NBFC or HFC. “Most banks would rather take exposure to the underlying borrower than extend credit to a finance firm. In fact, banks are seeing this as an opportunity,” said a senior banker.

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