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RBI moratorium; a few hits, a few misses
* RBI infuses liquidity along with a conditional moratorium: During the recent monetary policy announcement, the Reserve Bank has issued a slew of measures to ensure sufficient liquidity is available during these uncertain times. Apart from cutting the Repo rate by 75bps, the apex bank has offered a moratorium of three months to all endborrowers who are likely to be impacted by the recent lockdowns and social distancing under Covid-19. The RBI has also opened a separate LTRO window through which banks can infuse sufficient liquidity to smoothen overall capital market transactions as well.
* No blanket offerings of a moratorium; revenue loss would be limited: Our discussions with various NBFC managements confirm that there won’t be any blanket offering to endborrowers to opt for such deferment of payments but would be available only for the needy ones. The borrowers opting for deferment will either have to extend their tenure else increase the quantum of EMIs to compensate for the revenue loss for NBFCs. Thus, technically there won’t be any major revenue loss for NBFCs at least till June 2020.
* NBFCs dependent on bank borrowings at a relative advantage: Since the deferment is available from banks as well, NBFCs with elevated share of bank borrowing (CIFC, MMFS, SHTF) may opt for similar deferment from banks, thus relatively safeguarded. However, NBFCs with higher share of bond market borrowings (LICHF) could raise incremental money from the LTRO window at the cost of margins. Our assessment suggests that NBFCs with relatively stronger liability franchise (HDFC, Bajaj Finance) would anyhow be better-placed as their ability to raise funds at lower costs would help margin disruptions. (see Exhibit 4)
* Collections/Recoveries already impacted: Our channel checks suggest that the current lockdowns have not only impacted credit growth but also overall collection and recovery mechanism for most of financiers as they are being severely impacted mainly by the absence of field staff. This phenomenon is expected to have even more impact during Q1FY20 since lockdowns are expected to be more severe in April 2020. If the current situation is extended for a few more days, say May 2020 or beyond, the phase of elevated credit costs would remain at least for the next two quarters (H1FY21).
* Small-ticket loans most vulnerable; credit cards better off: Smaller-ticket loans such as durable loans, Micro Finance loans and personal loans are at more risk as EMI deferment disturbs the basic financial discipline of repayments which is relatively difficult to normalize. In addition, the trend suggests that credit card recoveries/repayments are better off even now as end-borrower continues to clear their credit card dues as to continue availing liquidity.
*HFCs are better-placed than AFCs; HDFC remains the winner; BAF and CIFC offers a value Buy post recent correction; MMFS avoidable: The overall impact of RBI deferment would be more visible to AFCs over HFCs since recoveries are better among large-ticket secured loans. HDFC Ltd. remains our preferred pick with safer asset composition (salaried mortgages), longer maturity duration (72 months) and superior collection efficiency (99% digital). CIFC has high preference followed by BAF post the recent correction; however, elevated discretionary exposure (including auto) and shorter maturity duration keep us cautious. We would prefer MMFS the least due to rising delinquencies and low coverage. LICHF is the worst-placed on the liability side (~60% bond market funding); however, the asset book is relatively safe due to secured mortgages.
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