Moratorium extension a mixed bag
Liquidity management a priority; Focus to be on collections
* The RBI has announced an extension of three months for the existing loan moratorium i.e. banks and NBFCs are now eligible to grant moratorium till 31st Aug’20. In our view, this is a mixed bag for NBFCs – while it provides relief to borrowers, it also further stretches the ALM mismatch for many NBFCs.
* While moratorium granted on loans varies from 20% to 100% across NBFCs, the moratorium provided to NBFCs from banks is negligible. This is likely to result in a cash flow mismatch for NBFCs. As a result, NBFCs would focus on conserving liquidity to honor payments. Banks that refrained from providing moratorium on the argument of cash-flow based requirement may now be compelled to extend it to NBFCs or expedite the process of extending new lines of credit.
* According to our analysis, most NBFCs have enough liquidity to sustain this ALM mismatch till Aug’20. In addition, the larger NBFCs are getting sanctions from banks, while some are even able to raise money from capital markets. However, problems for small NBFCs remain. Given the heightened risk aversion, banks are unwilling to lend to them (as witnessed in the first auction of TLTRO 2.0). The extension of the moratorium further accentuates the problem. We believe risk aversion to this segment would continue until demand improves materially.
* With the opening up of the economy in the Green and Orange zones, our discussions suggest improving collection efficiencies for vehicle financiers, which provides relief on debt repayments. However, we believe that post moratorium, collection efficiency would still be sub-par, and hence, ALM management remains an important event beyond Aug’20.
* Valuation and view: Given the tough economic environment and the risk aversion in the system, we expect problems for the NBFC sector to continue. In addition, post lifting of the lockdown, it is unlikely that demand in key categories (housing, vehicles, etc.) would return to normal soon. We believe that FY21 would be a year to focus on liquidity and asset quality, rather than on growth and profitability. We prefer large NBFCs with stable funding sources, good parentage and a higher share of formal, salaried customers. Our top pick is HDFC.
Liquidity adequate with large NBFCs to tide over the crisis
In our previous Sector Report, after analyzing the adjusted ALM for all NBFCs, we concluded that most NBFCs would be able to manage their ALM for the next three months. This was due to high levels of liquidity on the balance sheet (average of 8- 9% of AUM). We now analyze the ALM after considering extension of the moratorium. Once again, most companies would be able to meet their debt obligations over the next few months. Some important points to consider: (a) our interactions with managements suggest that some borrowers, despite availing a moratorium, are repaying part of their EMIs, (b) banks have started sanctioning loans to NBFCs on a case-by-case basis, and (c) recent government initiatives on the liquidity window and the PCG scheme could help NBFCs partially.
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