Banks, NBFCs Tumble As A Likely Liquidity Crisis Threatens Markets Even As US Fed Hikes Rates
Worries of a liquidity crisis have started to grip markets hitting banks and finance companies hard. A reluctance of banks to lend to the NBFC sector and an asset-liability mismatch in certain NBFCS triggered a sell-off in most of these counters as most finance counters gave up 2-10 percent.
The BSE Finance index fell 1.95 percent as against the broader bellwether’s fall of just 0.6 percent. The carnage was widespread and affected many mid- and small-caps too with the BSE Midcap index tumbling -2.19 percent and the BSE Small-cap index sliding -2.57 percent.
Banks are said to be curtailing their lending to the NBFC sector. “The lending reluctance toward NBFCs is expected to continue considering the uncertainty prevailing among capital market lenders towards the credibility of rating agencies and credit profile of NBFCs,” said Jignesh Shial of Emkay Securities in a report to clients.
The US Fed also raised rates by 25 basis points to 2.25 percent and indicated that more rate hikes are on the anvil in 2019 sending global stocks into a tailspin. The news further exacerbated the fall in Indian markets, particularly financial stocks.
A rate hike news sends bond prices hurtling thus affecting the balance sheets of banks as well as raising the cost of borrowing and contracting the net interest margins.
Almost all financial stocks were in the red barring HDFC Bank, which gained 0.94 percent to Rs 1977.95 paise. Bajaj Finance lost -4.86 percent, Edelweiss (-10.35), Dewan Housing (-4.87), IIFL Holdings (-7.05), IndiaBulls Housing (-6.05), Oriental Bank (-6.11), PNB (-6.4) were among the heavy losers. Reliance Capital also lost 7.5 percent in a day that was marked by red in all but a few financial stocks.
Experts reckon that the financial crisis could stay for a while affecting the growth of the financial sector over the next two quarters. NBFCs have increased their credit lending market share in the last five years from 14 percent in FY 12 to 22 percent in FY18.
Some of the better run NBFCs with higher credit ratings are expected to see through the turmoil. “NBFCs with best-in-class credit rating are expected to sail through such tough times more comfortably,” further elaborated Shial in the report.
A few days ago, IL&FS defaulted on its debt obligations sending the bond markets into a tailspin with yields for certain bonds surging higher. Incremental borrowing costs for NBFCs could rise sharply as corporate bond yields are expected to rise to price the uncertainties. Analysts expect NIMs of NBFCs to contract 15-30 basis points in the coming years.
While NBFCs with lower credit profiles could get impacted, a flight to banks and finance companies with better balance sheets is expected. Analysts expect a flight to safety to a few private sector banks, government securities, and stronger well-entrenched NBFCs.
