In the last couple of months, the big worry in the stock markets has been the NBFCs. For a long time, they were seen as the fleet-footed alternative to staid banks; growing faster and subject to lesser regulation. That seems to have changed in the last couple of months. Consider the price correction. Blue chips like Bajaj Finance and Bajaj Finserv have corrected nearly 30%. Stocks like Indiabulls Housing Finance and Repco have give up a whopping 60% of their value while Dewan Housing is down nearly 70% in a little over a month. Even the brokerage houses with strong NBFC franchises have not been spared.

Questions on asset quality

The problems first came to light when the IL&FS fiasco first broke out. Most of the NBFCs had a huge exposure to IL&FS debt paper. It opened a Pandora Box because most NBFC had lent to the real estate and the infrastructure sector in a big way. Not only were these loans stuck but were being consistently rolled over. Most of these loans also had a maturity mismatch because NBFCs were borrowing at the short end via CPs and lending to real estate projects at the mid to long end. The bigger worry is that higher fuel prices, weaker dollar and the trade war could hit the SME sector badly. This would mean defaults by SMES, which have been a traditional market for NBFC lending. This debate is likely to come back time and again to haunt us in the next few months.

Where will they borrow from?

The big challenge for the NBFC is now about fund raising. They need a constant access to low cost funds to sustain their lending business. If the momentum is lost then overheads and size start becoming a constraint for the NBFCs. There are three challenges that NBFCs are facing at this point of time. Firstly, the bond yields have gone up sharply to around the 8% mark. That is making borrowing costlier even at the short end of the yield curve. Secondly, considering their recent problems, most existing investors are unable to find liquidity in the markets. That is forcing some of these holders to sell NBFC bonds at yields as high as 11-12%. We saw in the case of DSP Mutual Fund selling DHFL bonds. Lastly, investors are worried about a credit downgrade backlash on NBFCs. That could mean huge write-offs for investors. For now the taps are surely running dry!

Beware of regulation

The biggest worry is that the IL&FS fiasco may force the RBI to regulate NBFCs as stringently as the banks. That would mean stricter capital adequacy, NPA provisioning etc. Those who remember the NBFC crisis of 1998 would remember how Dr. Jalan’s NBFC regulations changed the face of NBFCs in India forever and led to a huge disruption. The last thing NBFCs want is a repeat of the 1998 squeeze! ©

China GDP

We actually need to worry about the recent fall in GDP growth

One of the points of celebrations in India in the last couple of years has been that India is growing faster than China. With China just growing at 6.5% in Q3, India’s GDP growth is likely to beat that by a comfortable margin. Is that reason to celebrate? Not exactly!

Growth worries globally

With an annual GDP of close to $13 trillion, China is the second largest economy in size and the largest in terms of demand. It has an insatiable appetite for everything from metals, alloys, minerals, agri products, fashion items, cars and aircraft. Even a 50 basis points slowdown in China will have a major impact on the demand of all these products. We have seen JLR shutting its European plant for 2 weeks to offset the fall in demand from China. This applies to almost every single product today. That demand shrinkage in China will have a contagion impact on India too.

Watch out for the Yuan

The bigger concern from China could be on the currency front. There are two events of importance here. Firstly, the US sanctions are unlikely to be diluted in the near future and that means the impact on trade will continue. For an export driven economy like China, the only way out will be to let the Yuan weaken in a managed band. We did see in 2015 that a weak Yuan has the capacity to wreak havoc on most emerging market currencies including India. The last thing that India would want at this point is further volatility in the INR which has stabilized after a long time. A weaker Yuan will also make it easier for China to dump its products into India at a lower cost. India will have to either impose CVDs or let local industries in suffer in the process. Slowing growth in China is not good news. For India, it could stall the nascent economic reco