NBFCs PREFER LONG TERM BOND ISSUES

The Finance Crunched NBFCs now has forced them to prefer in the diversification of their funds to avoid the old story of Sept-Oct which had brought a threat to its business model.  They have now preferred to adopt various methods to rid of the issues faced by them.

1. They now prefer to reduce their short-term lending and shift to Long Term bond issues.
2. This in turn will not bring any change in their working due to increased interest rates, of course, a little reduction in their profits could be foreseen.
3. This means they would be diversifying their resource base.
4. Also, the NBFCs are shaking their borrowing resources since they have plans to bring down the sale of their commercial papers by December this year.
5. The new pattern has resulted in an increased cost of 75-100 basis points.
6. Also, NBFCs are looking in to the possibilities of diversifying their liabilities profile through exploring the various options like ECBs and Masala Bonds which in turn would augment their long-term borrowing portfolio.
7. It is likely that CPs will be replaced by
   1. Term Loans
   2. Non-convertible debentures and
   3. Off-balance sheet borrowings.

Current Scenario:

• As of now, in order to spread their books, NBFCs and Finance Companies have been raising funds now through
  • Selling of Assets
  • External commercial borrowings and
  • Bank Loans
• Due to a change in the liquidity scenario NBFCs are looking into the possibility of reducing the share of CP funding by 40-50 per cent by the end of this financial year.
• Commercial papers constituted 24% of IIFL borrowings at the end of September quarter (Normally, CPs are short term debt papers with less than one-year maturity period)

Prelude:

1. This year RBI has permitted Home Financiers to borrow through external commercial borrowing under the automatic route.
2. Thus, Housing finance companies are looking forward to going for a borrowing of $750 million through this route.
3. Retail lenders have been focussing on securitization and reputed groups
4. Commercial paper book of Dewan Housing Finance has fallen to 1.50% of total borrowings.

With this large and well rated NBFCs will look forward now to tap retail FD or retail NCD route.

Real diversification is expected to be possible through deepened penetration into the bond markets.