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* Confusion over NBFCs’ eligibility to avail the RBI announced moratorium from banks: During the recent monetary policy meet, the RBI has offered a moratorium of three months to all term loan borrowers, who are likely to be impacted by the lockdown and social distancing during the Covid-19 outbreak. As per media reports, NBFCs/HFCs are excluded from such deferment and are liable to pay regularly. According to the reports, the only option open for NBFCs/HFCs would be a separate LTRO window through which banks can infuse sufficient liquidity in order to smoothen bond market transactions.
* Our findings show there is a lack of logic in the rumor: Our recent discussions with management of various NBFC/HFC clearly highlighted that the moratorium is equally and quite clearly allowed to NBFC/HFCs as well. Technically, not allowing NBFCs/HFCs to defer their term loans during the current crisis would completely deteriorate the entire liquidity measures undertaken by the RBI. Interestingly, further reading of FAQs published on the Press Information Bureau’s website (pib.gov.in) clearly suggests (refer exhibit 1) that NBFCs/HFCs are not eligible for deferment of interest on working capital loans. Thus, term loans obtained from banks by all NBFCs/HFCs are fully eligible under the moratorium and our discussions suggest that many NBFCs/HFCs would avail the same.
* NBFCs with higher bank borrowings are at an advantage; however efficient NBFCs are better placed: Since the deferment is available from banks, NBFCs with an elevated share of bank borrowings (CIFC, MMFS, SHTF) may opt for a similar deferment from banks and are relatively safeguarded. However, NBFCs with a 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 aid margin disruptions. (Refer exhibit 2)
* Regulatory confusion remains only on rating downgrade of securitized pool: Our discussions with management also indicate that the only unclear aspect of this entire exercise is the rating downgrade of securitized pool of assets of such NBFCs and HFCs. As per management, the pool of assets, including such deferred loans, should be exempted from downgrade as the said restructuring mandate is from the RBI. In case of ratings downgrade of such pools, NBFCs would suffer further margin pressure due to elevated discounting by pool buyers. Also, many financial institutions may opt to stay away from the securitization of these assets. NBFCs/HFCs are confident of resolving this issue with the RBI and SEBI soon.
* HFCs better placed compared to AFCs; HDFC remains the winner; BAF and CIFC offer attractive risk-reward post correction; MMFS avoidable: The overall impact of the 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 prefer MMFS the least due to rising delinquencies and low coverage.
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