NBFCs Put Up A Brave Face As Stocks And Collections Turn Volatile
The government’s decision to withdraw Rs 500 and Rs 1,000 notes has impacted stocks across different sectors ranging from consumer goods and two-wheeler manufacturers to banks and non-bank finance companies (NBFCs).
Shares of NBFCs, in particular, have corrected by as much as 25 percent in some cases as investors worried about whether collection of dues would be impacted by the shortage of currency. To be sure, NBFC stocks had run up considerably in the earlier part of this year so some of the current fall may just be a return to normal.
Managements of a number of NBFCs that BloombergQuint spoke to and those that have issued statements to the stock exchange said that while there has been some volatility in collections, they expect it to normalize as cash supply returns.
The experience has also varied from segment to segment.
For instance, housing finance company Can Fin Homes Ltd. said they haven’t seen any impact on collections or fresh disbursements as 100 percent of their collections are bank based (ECS, NEFT or post-dated cheques). The management like many others is waiting to see how long it takes for cash supply to normalize.
Business going as usual. Till now I have not seen any positive or negative impact on the daily operations. This is because the announcement came in the middle of the month. Most of the payments (EMIs) are paid at the end of the month. So we will get to understand more then.Atanu Bagchi, CFO, Can Fin Homes
Others like Shriram City Union Finance Ltd. have seen a surprising 40 percent jump in their collections since 8th November 2016 as borrowers have gone and deposited whatever cash they had, channeling their repayments via the banking system. According to the management, about 60 percent of the repayments are in cheque-based. As for the rest, the company said it will wait till the end of the month to assess the situation.
On cash collections, large portion is two-wheeler collection, which is in the range of Rs 2,000-3,000 per EMI, which is not large. Once the cash rationing is done away with, I don’t think the two-wheelers collection should be an issue. This will be a temporary impact till the legal tender is freely available. It’s too early to comment as all the lending which we are doing right now is all business that was in the pipeline. Now whatever customers we are going and meeting, we will have to see how the reactions are.Subhasri Sriram, Executive Director & CFO, Shriram City Union Finance
The extent of pain could be deeper for those who lend in rural markets and also those whose customers come from cash-based sectors like retail. However, Satin Creditcare Network Ltd., a microfinance company which works across both rural and urban market has indicated that collections have improved after an initial drop.
Satin creditcare stated that collections have gone up from 15 percent (November 14) to 34 percent (November 16) in the last three days. Gujarat and MP are highest at 45 percent... Management expects collection ratio to improve gradual as cash availability improves in rural areas.Parag Jariwala, Analyst, Religare Capital Markets (Source: Research Note)
In a regulatory filing to stock exchanges, other NBFCs like L&T Finance Holdings Ltd. and Mahindra & Mahindra Financial Services Ltd. have indicated that while there has been some short term volatility, loan officers are trying to guide customers through the process of repaying through bank accounts.
Consumer lender Bajaj Finance Ltd. also indicated in its filing to the stock exchange that there has been a short term hit to disbursements in the consumer financing businesses, which accounts for 33 percent of the company’s assets under management. Other businesses including personal, business and commercial loans are not expected to see any near-term impact.
Will Business Growth Be Impacted?
While collections may normalize as cash returns, there are lingering concerns of the impact that the government’s demonetisation move will have on the economy and hence the ability of businesses to grow.
GDP growth could be impacted by 0.7-1 percentage point over a year, wrote Pranjul Bhandari, chief India economist at HSBC in a note on Thursday. Pronab Sen, former chief statistician of India told BloombergQuint that the hit to growth could be upto 1 percent with cash-driven sectors like retail taking the hardest knock. Some concerns have also been raised on agricultural productivity as anecdotal reports suggest shortage of cash to meet the needs of the sowing season.
All this, eventually, may hit business growth unless the currency shortage is quickly reversed.
More than collections and NPAs, I am more worried about business slowing down. Will have to see if guidance of 20 percent growth for AUM in FY17 can be met, I don’t know yet, it’s too early to comment.Subhasri Sriram, Executive Director & CFO, Shriram City Union Finance
L&T Finance Holdings has warned of disbursements halving to about Rs 180-180 crore this month as compared to the average run-rate of Rs 400-450 crore disbursement/month. The company has seen some drop in initial sales especially in their two-wheelers and farm equipment segments.
In the housing finance segment, there could be some delay in purchases as prices are expected to decline following the government’s crackdown on black money.
The Silver Lining
While analysts are building in a short-term disruption, NBFCs could see some indirect benefits.
The fall in bond yields could be positive for the margins of NBFCs if there is no significant spike in delinquencies in the near-term. Also as the supply of cash-based loans through informal channels, more customers may be drawn to borrow from NBFCs.
In addition, there is some anticipation that the RBI may ease asset classification norms for loans to small and medium enterprises. On Wednesday, the Financial Express reported that some kind of forbearance may be given to tide over the crisis.
NBFCs, given a larger share of cash transactions and lending to people with relatively weak income profiles, are likely to see greater pressure on collections in the near term. While this is still uncharted territory, a key near-term catalyst for stocks to watch will be whether the RBI/Finance Ministry allows MFIs and/or other NBFCs to collect cash in discontinued denominations following representations by the respective industry bodies (MFIN and FIDC).Morgan Stanley Research Report