NBFC stocks crash after RBI mulls stricter norms; DHFL slips 18.5%

The correction in non-banking financial companies (NBFCs) extended on Monday as investors dumped shares fearing that the proposed norms by the of India (RBI) would impact growth and profitability. The central on Friday said it was looking to strengthen norms for to avoid rollover risks. It also urged financial firms to reduce their dependence on short-term funding, and instead make use of long-term funding.

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CLSA, in a note, said many are becoming systemically important and have a higher dependence on short-term sources such as commercial papers and mutual funds. The could extend requirements such as liquidity coverage ratio to NBFCs, which are currently applicable to banks.

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The has said the new stricter regulations would be aimed at curbing default risks arising from such asset-liability mismatch (ALM).

NBFC stocks crash after RBI mulls stricter norms; DHFL slips 18.5%

Depending on short-term debt to garner a bigger share of the lending market is a “myopic strategy,” Deputy Governor had said at the post-policy conference on Friday.

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“The RBI said that it would look at measures to strengthen ALM at to prevent mismatches. We await details but this could have negative implications for loan spreads and loan growth,” said in a note. “Every 1 percentage point shift in mix of borrowings from commercial paper to long term non-convertible debentures (NCDs) or borrowings could increase cost of funding by 0.5 to 1 basis points, depending on the credit rating profile.”

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The brokerage said investors should prefer large lenders such as HDFC Ltd, who are positioned well in terms of liquidity. Shares of fell 2.6 per cent to Rs 1,670 on Monday.

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“With increasing regulatory scrutiny on ALM, we expect NBFCs to ‘normalise’ their borrowing profile — that is migrate from opportunistic funding to more stable and sustainable funding. This would lead to a larger-than-expected increase in cost of funds. We believe this would have a twin impact on both margins and growth. We expect growth to taper for some of the fastest-growing NBFCs,” said Motilal Oswal in a note on Monday.

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The brokerage cut earnings estimate for the current and next fiscal year by 4 to 7 per cent for NBFCs. It also lowered the price targets for NBFCs across its coverage universe by 8 to 27 per cent to factor in cut in earnings and higher cost of equity.

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in a note said strong promoter-backed NBFCs and housing finance companies (HFCs) will get disproportionate share of funding and competition from new and small NBFCs will come down massively.

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It said broker-backed NBFCs like Edelweiss and HFCs with ALM mismatch DHFL, PNB Housing, will see growth slowdown.

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