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NBFCs: A stitch in time saves nine
* Elephant in the room; consolidation advantageous yet resolution is necessity: The lending disinclination toward NBFCs is continuing, considering the uncertainty prevailing among capital market lenders surrounding the credibility of rating agencies and the credit profile of NBFCs. Though we do favor an overall consolidation in the NBFC sector (with few casualties of weak players), penalizing the entire sector would be relatively unwise decision. With the formation of a stable government at the Centre, we expect some assistance to the sector in order to maintain India’s consumption momentum intact and avoid the trigger of retail NPA cycle,
* RBI’s recent guidelines over ALM/liquidity to strengthen liability profile; Introduction of LCR would be litmus test for NBFCs: The Reserve Bank has introduced a draft circular on the “Liquidity Risk Management’ Framework for NBFCs. The draft guidelines cover application of generic ALM principles, granular maturity buckets in the liquidity statements and tolerance limits, liquidity risk monitoring tool and adoption of the “stock” approach to liquidity. The draft proposes to introduce Liquidity Coverage Ratio (LCR) for all deposit taking NBFCs; and non-deposit taking NBFCs with an asset size of Rs50bn and above in a calibrated manner from April 2020 to April 2024. The move would ensure sufficient liquidity available to NBFCs at any given time ensuring no negative surprise on ALM side.
* OMOs remain the preferred tool; repo window for NBFCs unlikely: On the liquidity front, we believe open market operations (OMOs) should be a preferred tool for the Reserve Bank of India (RBI), as this would create the least disturbance to the overall monetary structure. With several discussions over the RBI opening repo window for NBFCs, the central bank may be reluctant to do so considering the weak quality of assets with many NBFCs/HFCs, in our view. RBI’s recent announcement of LCR for NBFCs would further boost overall liquidity for NBFCs.
* Franchise dominance to continue – More concentrated bets in our NBFC EAP: Our preference for NBFCs with decent promoter backing, superior Asset-Liability profile and stable asset quality remains intact. We continue to take concentrated bets with our major OW stance staying with BAF, HDFC and Cholamandalam Finance. We are further adding RNAM and Magma Fincorp to our OW bets considering healthy growth and attractive risk reward. We have been major UW on Shriram Transport and SCUF which has yielded superior returns. We maintain Edelweiss and LTFH to our major UW calls considering weak growth and elevated default risk.
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