Even as investment by mutual funds in debt papers of non-banking financial companies (NBFCs) fell sharply starting September 2018, when the IL&FS default rattled debt markets, the mutual funds industry funding to better-run and retail-focussed NBFCs jumped sharply since September last year.
The funding squeeze for NBFCs seems to be company specific and not across the board, according to discussions with industry people.
For example, while the total MF funding to DHFL group fell from Rs 18,235 crore at September-end 2018 to Rs 6,501 crore at April-end 2019, in the case of retail-focused NBFC Bajaj Finance, the MF industry holdings jumped from Rs 7,599 crore at September-end 2018 to Rs 13,520 crore at April-end 2019.
Other such NBFCs that did not have much wholesale loans on their books — such as Muthoot Finance, Magma Fincorp group, HDB Financial Services among others — also attracted higher resources from the MF industry.
Despite the churning of investments by MFs away from certain NBFCs, their overall investment in the space has risen by Rs 48,857 crore from Rs 13.64 lakh crore at September-end 2018 to Rs 14.14 lakh crore at April-end 2019, according to data from industry sources.
However, MF lending to NBFCs and housing finance companies fell to Rs 3,12,308 crore in April 2019 from Rs 3,79,425 crore in September 2018.
Industry players said that while there does not seem to be a risk of contagion on account of funding woes of DHFL and a few others companies, there could be some consolidation in the NBFC sector and ultimately investors and mutual funds would look at the business model and finance those that have no asset liability mismatch (ALM) or those with a positive ALM. ALM can occur when NBFCs borrow short term but lend long term such as housing loans. There is no trouble in such a business model till the time NBFCs are able to rollover their debt obligations. When debt rollover is not possible, the business model crumbles.
“There will be a temporary hiccup. There will be a kind of a shakeout, some consolidation might happen, but again (funds and investors) closely see what is the business model, where are you lending, who is your customer, what is your ability to collect,” Thomas John Muthoot, CMD of the Muthoot Pappachan Group (MPG), which runs NBFC Muthoot Fincorp, told The Indian Express when asked whether the present crisis could turn into a contagion.
“In the months of October and November, right after the IL&FS default, we had slowed down lending activity and were holding cash but since then business is back to normal,” he said.
MFs and investors have started differentiating between wholesale and retail NBFCs. While earlier MFs had been investing heavily in commercial papers and NCD (non-convertible debentures) of all NBFCs, now they are doing pick-and-choose based on the kind of business model,” an industry source said. Funding to the microfinance industry, meanwhile, has not suffered after the IL&FS crisis and banks continue to aggressively lend to them.