MUMBAI: Non-banking finance companies which faced their worst liquidity squeeze in about a decade are diversifying their funding to avoid the repeat of September-October scenario that threatened their business models and raised doubts about their ability to face headwinds.
There is a kind of exodus from short term borrowing that helped boost their profitability to longer term funding that would stabilise the volatility but would increase their costs, said industry experts.
While the process has started with companies such as IIFL Holdings, Indiabulls Housing and Dewan Housing Finance already setting in motion, others would also be doing so as mutual funds which were key lenders to the segment are turning way.
“In view of the changed liquidity scenario, we are actively looking to reduce the share of CP funding by 40-50 per cent by the end of this calendar year,” said Nirmal Jain, chairman, IIFL group.
"CPs will be replaced by term loans, non-convertible debentures and off balance-sheet borrowings," he said.
Commercial papers constituted 24 per cent of the IIFL borrowings by the end of September quarter.
CPs are short-term debt papers with less than one-year maturities.
The companys incremental cost of borrowing has risen by about 75-100 basis points while the average cost of borrowing is estimated to rise by 30-40 basis points due to higher rate of interest as well as change in the liability mix towards more long-term borrowings, according to Jain.
NBFCs as a segment were pummelled in the current quarter as lending to this segment froze after Infrastructure Leasing & Financial Services, with outstanding loans of about Rs 91,000 crore, defaulted on payments.
The NBFC industry which had grabbed about 9.5 per cent of mutual fund money via commercial paper subscriptions in September and 7.54 per cent in corporate debt, found it difficult to rollover their Commercial Papers.
Commercial paper book of Dewan Housing Finance has fallen to 1.50 per cent of total borrowings from 8 per cent, the company had said in a statement issued in November.
Now, these companies are looking to raise funds with a longer tenor bonds or from bank loans and they are even raising their liquidity position by selling assets to banks.
“We are looking to further diversify our liability profile by exploring options such as ECBs and Masala bonds as part of our long term borrowing plan,” said Rajiv Sabharwal, MD & CEO, Tata Capital. “CPs forms a relatively small composition of our debt mix and has come down to early teens.”
Nearly 38 per cent of the debts incurred by finance companies required refinancing over a 12- month period, said Moodys Investor Services. Most of their short-term debt was owed to non-bank sources such as market borrowings with a higher risk of rollover than bank borrowings.
This year, RBI has allowed home financiers to borrow through external commercial borrowing under the automatic route. Housing finance companies are looking to borrow around $750 million through the route.
Some retail bond issues are also happening.
“Retail lenders are already focusing on securitization and reputed groups like MMFS and Shriram are also looking at ECB route,” said Digant Haria analyst Antique Broking. "Large and well rated NBFCs will look to tap the retail FD or Retail NCD route. Though real diversification is possible only with the deepening of bond markets.”