The current liquidity crisis in the non-banking financial companies’ (NBFCs) sector may not pose a systemic risk for now but investors are worried over its potential impact on the overall growth of the economy in the near term, say market participants.
The recent past had seen brokerages highlighting concerns in the NBFC segment and their impact on the overall consumption story thereby affecting macroeconomic growth even as many such NBFCs are facing rating downgrades and tighter access to liquidity.
“Many investors still appear concerned about the ongoing financial crunch led by the NBFC sector and its impact on discretionary consumption and hence overall growth,” said UBS in a report released on Wednesday. High risk aversion, delayed monetary transmission and subdued mutual fund flows could result in a further slowing of the sector, the report added.
Track record important
According to the global financial major, large NBFCs with strong parents and track records are better positioned while small NBFCs could lose market share, with a sharper slowdown for mid-sized and small housing finance companies (HFCs).
Incidentally, in a statement issued to the stock exchanges, Dewan Housing Finance Ltd. (DHFL) said that it had stopped the acceptance and renewal of fixed deposits (FDs) due to the recent downgrade of the credit rating of its FDs.
The revised rating is below the minimum rating prescribed under the National Housing Bank (NHB) norms for the acceptance or reneweal of FDs, according to the statement.
DHFL loses 10%
Shares of DHFL lost almost 10% on Wednesday even as the benchmark indices gained marginal ground.
Similar weakness was seen in other NBFC stocks as well with Indiabulls Housing Finance, Canfin Homes, JM Financial, Shriram City Union Finance, Cholamandalam Investment and Finance Company and Muthoot Finance all ending the day in the red.
Interestingly, a recent note saw global financial major CLSA attributing the weak volume growth of most FMCG companies to “low availability of financing at their channel partners following the NBFC issues, which have dragged on.”
The cascading impact of a slowdown in NBFC financing can be further gauged from the fact that recently Nomura also lowered its weightage on the automobile sector attributing it, among other reasons, to “slowdown in consumer financing due to the NBFC crisis.”
“Growth in disbursement is stalled and we project a decline in disbursements by NBFCs in FY19 given issues around tight liquidity and asset quality issues.
The NBFC slowdown has also hurt consumption at the margin,” said Nomura in its report.
