Lakshmi Vilas Bank-IHF model may set new trend

Several nervous NBFCs said to be seeking tieup with banks

KOCHI: A positive outcome of the eagerly awaited Lakshmi Vilas Bank (LVB)-Indiabulls Housing Finance (IHF) merger move could kick-start several other similar moves as there could be many non-banking finance companies (NBFCs) that may be weighing the option of merging with small banks, especially in the South in the new context.

The plight of the once-respected IL&FS that has been roughed up in the credit rating space lately through multiple-notch downgrades by leading rating agencies following series of credit defaults, has had its knock-on effect on NBFCs as a class, raising serious doubts about their efficacy in raising funds from the market in the future.

On the one hand, raising funds through NCDs or commercial papers has turned out to be more expensive in the new scenario and on the other, many small banks, especially those from the South, having burnt their fingers at corporate lending, have found retail as their new focus area for business.

The fact that banks have been contributing to more than half of these NBFCs’ funding matrix would leave their equations more interesting in the future. The NBFCs that have locked bulk of their funds, more than 90 per cent in many cases, in gold loans, have been gradually diversifying business into areas such as home loans and vehicle finance where the yields are much lower than that offered by gold loans.

According to experts in the field, relying on gold loans alone may prove to be imprudent in the long run as unrealistically high interest rates are unlikely to have long life as regulations the world over are moving in favour of small consumers.

Many NBFCs have confided to that they fear that in the event that any state government requires them to comply with the provisions of their respective state money lending laws, or imposes any penalty, including for prior non-compliance, their business, results of operations and financial condition may be adversely affected.

“In a way there is ambiguity on whether or not NBFCs are required to comply with the provisions of state money lending laws that establish ceilings on interest rates,” CFO of an NBFC noted few months back while talking to this portal.

In the case of banks, the trust they enjoy amongst the depositors helps them raise funds rather easily, and most banks are now focused on CASA deposits that come far cheaper for the banks.

Highlighting the prospects for more NBFC-bank mergers in the offing, a top official of State Bank of India (SBI) reportedly said that finance companies that don’t take deposits need a stable source of capital and banks can help them with that.

Dinesh Kumar Khara, a managing director at SBI was also quoted as saying recently that banks also want to expand their liabilities, and NBFCs can play a role in that.

“NBFCs need to find “ways to survive,” after many began facing a liquidity shortage following shock defaults at IL&FS last year,” Khara said.

Until recently, no decent NBFCs would bother about their asset-liability management or fund base or even their profitability. The leading NBFCs in Kerala such as Muthoot Finance and Manappuram Finance have been merrily raising funds through different sources such as NCDs, commercial papers or bank finance, with the banks and financial institutions (FIs) contributing to the bulk of their fund requirements.

Certainly, this is unlikely to change soon for the strong NBFCs, according to experts. While these NBFCs have been enjoying net interest margin (NIM) in the region of 13.5 per cent to 15 per cent, in contrast, the banks have been struggling to maintain NIMs in the range of 2.5 per cent to 4 per cent.

The Kerala examples point to an interesting scenario that the shares of the leading NBFCs that primarily depend on gold loan business for their volumes and bottom line, are traded at two to three times their book value, whereas the shares of the decades-old banks in the state are traded at deep discounts to their book values (BV) except for Federal Bank.

But the new developments led by IL&FS have dent holes in the credibility of NBFCs prompting many of them to chalk out new strategies for survival.

As per prospectuses in the public domain, some NBFCs focused on the South markets have their fund-raising instruments like NCDs and commercial papers nearing their maturities.

“In order to retire these instruments, we will either need to refinance this debt, which could be difficult in the event of volatility in the credit markets, or raise equity capital or generate sufficient cash to retire the debt. If we are not able to do so, our financial condition, cash flows and results of operations may be adversely affected,” noted one NBFC in its prospectus a few months ago. The scenario has changed for worse since then.

There is resistance mounting on against the new models, though IDFC Bank-Capital First merger was concluded last December and the process for LVB-IHF merger is on.

Indeed, such alliances though may be hailed by the market mainly for their innovativeness, could hardly draw support from labour unions and regulators for the so-called long-term dangers inherent in it.

All India Bank Officers’ Confederation (AIBOC) has already registered their objection against the LVB-IHF merger move. “It is natural that NBFCs/Para Bankers/home finance companies (HFCs) try to gobble such banks to enjoy cheaper funds and thus grab a customer-friendly, next-door banking,” an AIBOC statement said.

Even the banks are being driven to the walls and they will also be forced to enter the fiefdom of NBFCs in an attempt to build stronger and sustainable bottom line.

Banks have started pushing gold loans at attractive pricing but still being able to make good yields from the portfolio. The NBFCs who were solely focusing on gold loan business have started establishing their presence in vehicle loans and home finances too in a big way, but their present fear is that the aggressive competition unleashed by the banks in those portfolios has started putting pressure on the high yields enjoyed by these NBFCs in home loans and vehicle finance – that are currently around 14 per cent and 18 per cent.

In a recent conference call organised by Manappuram Finance, a top official of the company explained that, to the extent the banks stay away from corporate lending business, they have started looking at the ‘retail pie’ for their growth. “You may have noticed that during the past 4-5 years, banks have been very aggressive in retail space, especially in housing and vehicle finance, and this has forced us to look at areas like micro finance as a new growth strategy,” the Manappuram official explained.



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