Growth at NBFCs/HFCs continues to decelerate. Funding is still tight as funding from MF/market borrowings is falling. Recent policy measures aimed at encouraging bank funding are positive, but risk aversion may take time to ease. More policy measures are anticipated in real estate sector, but issue around stalled projects and their funding needs to be resolved for stress in the sector to ease. Retain preference for HDFC/LICHF in HFCs; BAF, MMFS in NBFCs.
Growth deceleration continues: NBFC/HFC loan growth slowed to 13% y-o-y in Q1FY20 (15% FY19), as per our bottoms-up estimate. Including banks, system retail credit (banks + NBFC) growth was 15% y-o-y (FY19 16%). Retail housing book growth (NBFC, banks) fell slightly to 15% (15.8% in FY19), but home loan book of HFCs fell sharply to 8% y-o-y (FY19 10%) reflecting market share gains and portfolio buyouts by banks.
Funding availability still tight: MF debt investments (ex Gec, PSU bonds) are stagnant and MF funding to NBFCs is down 11% YTDCY19. Bond funding is still skewed to AAA rated NBFCs with strong parent. Mid-tier NBFCs are relying on bank funding. Coupled with stagnant funding from banks, disbursal has been constrained too. As per feedback from NBFCs, private banks are more willing to lend to NBFCs, but at steeper costs.
PSU banks are still reluctant, but seem more receptive in recent weeks. Can recent measures resolve the issues? More policy measures were announced in recent weeks by Govt/RBI Partial Credit Guarantee Scheme, though a positive, may not ease liquidity issues meaningfully given stringent conditions, guarantee fee costs. Increase in single party limit of banks to NBFCs may not help much too, but allowing on lending through NBFCs should incentivise banks to lend to NBFCs rather than buying out pools. That said, risk aversion may take longer to fade especially as corporate default newsflow remains elevated.
Developer stress unfolding: Developer NPAs have increased across most NBFCs/HFCs in Q1. Stress is widespread, but initial defaults are from mid-tier developers. Consolidation is taking place. Larger developers have managed stress better so far.
Asset quality issues may emerge in other segments: In vehicle finance, GNPAs have been stable so far, but feedback from CV operators suggest defaults by smaller operators could rise in next 6-12 months. In rural areas, collections have held up so far as per our feedback. Monsoon has been in line which is positive for Mahindra and Mahindra Financial Services (MMFS). That said spatial distribution has been skewed, with flood in many regions, which could affect collections.