In This Issue:
- Editor’s Column – Diversified NBFCs are showing the fastest growth
- A Step Towards a Vibrant Corporate Bond Market
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column –
Diversified NBFCs – Faster and Healthier Growth
We have analysed the performance of NBFCs over the last one year; dividlng them into various categories such as Diversified Business, Auto Loans, Housing Finance, Gold Loan, Infrastructure Finance and Microfinance.
We have observed that diversified consumer business NBFCs with retail focus are showing higher growth followed by Auto loan NBFCs. Commercial vehicle focussed NBFCs have higher NPAs. Gold loan NBFCs have higher net interest margins while housing finance NBFCs showed healthy growth with controlled NPAs.
For diversified business NBFCs NII growth was in the range of 14%-52%, Net profit growth was in a range of 40%-52%, NIM range was 2.9%-11% and gross NPA range was 1.5% – 4.8%
The Indian Consumer financing market is a big and growing opportunity. As per data published by various agencies, 9% CAGR increase in disposable income will drive affordability for higher valued consumer durables. Organized retail can facilitate higher demand especially for high-end products. Urban consumers are treating consumer durables as lifestyle products and are open to paying increased prices for branded products. Replacement cycle of consumer products has reduced from 10 years to 5 years. The market for white goods and electronic products such as TVs has been growing at 17%.
MSME Segment is growing rapidly in India. MSMEs account for 45% of the Indian Industrial output and 40% of the total exports. Micro, Small and Medium enterprises form a large part of the Indian Economy. They generate employment and act as a catalyst for socio-economic transformation in India. There are more than 51 million MSME enterprises across India employing more than 111 million people.
Bajaj Finance, Capital First, MAS Financial Services Ltd, L&T Finance Holdings yearly performance show robust net income growth with sustained profitability and stable asset quality. Consumer business, SME loans, Rural finance are highly growing spaces for these companies.
For Auto loan business NBFCs NII growth was in the range of 21-29%, Net profit growth at 24-35%, NIM varied 7.7-9.7%, gross NPA was ranged 1.29-9.15%
Shriram Transport Finance Company Ltd, Cholamandalam Investment & Finance Co Ltd, Mahindra & Mahindra Financial Services Ltd,Sundaram finance are major players in the auto loan sector, Yearly performance review shows strong net income growth, though growth was lower than diversified business NBFCs, with sustained profitability and higher NPAs. Commercial vehicle and pre-owned vehicle finance are high growing spaces in this segment.
Given rise in households, penetration levels are expected to improve from current 20 cars per 1000 people. Potential for extended penetration levels in the top decile, especially in the rural side. Small cars and UVs are expected to continue growing at 8-10% per annum due to new launches. Compact UV‟s have gained momentum on the back of aggressive pricing, premium features and petrol variants. Growth of large cars is expected to moderate on the back of intense competition and high base. Replacement demand will rise on the back of higher affordability, competitively priced launches and easy availability of finance. Higher disbursements are expected with reduced interest rate environment. Further, new model launches shall enhance demand. Capacity utilization of passenger vehicle industry has increased to 77% in FY17-18 from 68% in FY15-16 and is expected to continue rising.
Market for second hand truck financing is under penetrated with 60-65% of the market with private financiers who charge high interest rates. Stringent traffic regulations in major cities are limiting movement of higher tonnage vehicles. Financing amount of Rs. 1,350 bn is to be triggered through replacement demand for 1.35 mn new as well as pre-owned trucks. Stricter emission norms and legislative pressure on banning trucks of more than 15 years old to trigger replacement demand. Freight capacity is expected to grow at 1.25 times GDP growth going forward. Tipper sales to prop up growth with improvement in mining, construction in the longer term. Increased requirement for higher tonnage vehicles coupled with improved infrastructure to boost trailer sales.
Changes in warehousing pattern post GST, through increasing adoption of hub and spoke model, is driving the need for faster and efficient trucks. Bus Sales can be supported by growing urban population, demand from schools and corporates and increased intercity travel.
India is amongst the lowest in farm mechanisation compared to global peers with a significant scope for growth for tractor sales.
New CV Financing, lending rates are 14-16% while for Pre-Owned CV vehicles, 1-5-year-old trucks, rate is 15-16% and 6-10 years old trucks, rate is 18-24%.
For Housing loan business NBFCs NII growth was in the range of 1.5-23%, Net profit growth at 3-63%, NIM varied 7.5-9.7%, gross NPA was ranged 0.78-1.11%
HDFC, LICHF and DHFL CAN Fin Homes are major players. Yearly performance shows healthy net income growth, though less than diversified business NBFCs, with sustained profitability and controlled NPAs. Individual home finance is a major contributor to the portfolio.
Loan Book growth is expected to expand at 18- 20% CAGR from Rs. 14.3 trillion (FY17) to Rs. 33.5 trillion (FY22). High government support and increasing demand/ penetration in Tier II smaller towns to fuel loan growth over the period. Disbursements are expected to grow at 18 – 20% CAGR over FY 17 – FY 22 on the back of higher finance penetration, demand for affordable housing and increasing urbanisation. Mortgage penetration at 10% in India is 9 – 11 years behind other regional emerging markets like China and Thailand.
Long term growth to remain intact as the real estate industry becomes more transparent, affordability improves, prices stabilize in major markets and interest rates decline under MCLR regime.
Rising population and changing income demographics have contributed to a sharp rise in the number of households, especially in urban areas. The number of households is likely to rise with the change in the age mix, growing number of nuclear families, continuous urbanisation and increasing penetration of financing. Moreover, in the current scenario, population in the younger age brackets is very high.
For Housing loan business NBFCs NII growth was in the range of 7.9-22.5%, Net profit growth at -11% to 45%,NIM varied 14.7-16.5%,gross NPA was ranged 0.7-6.98%
Muthoot Finance, Manappuram Finance Ltd are major players. Yearly performance shows net interest margin is higher than other NBFC categories while Gold as single asset portfolio poses a concentration risk for these Gold loan NBFCs.
India possesses over 20,000 tonnes of gold, which is worth more than USD 800 bn. Organized gold loan sector penetration is Just 3%. India is the largest consumer of gold jewellery in the world put together with China, it makes up over half the global consumer demand for gold. Rural India is estimated to hold around 65% of total gold stock. For Rural India, gold is virtually the bank account of the people, as historically gold has been a good hedge against inflation and since it is liquid, a lot of savings are in the form of gold.
For Infrastructure finance business NBFCs NII growth was in the range of negative to 58.5%, Net profit growth at negative % to 58.5%,NIM varied 3.89-6.71%,gross NPA was ranged 2.2-7.15%
REC, PFC, PTC India Financial Services Limited and SREI INFRASTRUCTURE FINANCE LTD are major players. Yearly performance review shows that overall performance deteriorated. Construction, Mining and Allied Equipment finance have shown robust growth in FY18 while power finance and asset finance have shown negative growth, as RBI made NPA norms stringent for power finance and asset finances NBFCs
Government is providing significant push to infra development across segments with 19% CAGR growth in Infrastructure spending in the last 4 years. Bharatmala project and Rural roads-PMGSY provides much needed boost dose to the Road Industry. Power generation, total transmission and distribution and renewable energy are growing lending opportunities in India.
For Microfinance business NBFCs NII growth was in the range of 1.14-18.99%, Net profit growth at negative % to 56.9%,NIM varied 3.89-6.71%,gross NPA was ranged 2.4-3.6%.
Ujjivan small finance bank, Equitas small finance banks and Bharat Financial inclusion are major players. Yearly performance shows net income growth recovered since demonetisation with skewed profitability and improving NPAs. These NBFCs are looking to diverse their portfolio to other loan products.
There is a huge demand/ supply gap for microfinance. In FY17, Rs 910 billion was disbursed as Micro-Credit while demand is above Rs 5.4 trillion. Group lending model helps MFIs widen reach to low-income households even as banks have been the traditional source of funds. Constraints in the form of varying income levels, absence of collateral and significant fixed operational cost in proportion to small-ticket loans have limited their geographical and demographic reach. Geographically diversified portfolios help MFIs mitigate risks. Technology to be major enabler for MFIs to monitor portfolios and maintain asset quality. Managing local stakeholders is a key determinant of MFIs’ success.
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A Step Towards a Vibrant Corporate Bond Market
Recently released consultation paper by SEBI suggests that SEBI is considering to mandate large corporates to meet about one-fourth of their financing needs from the debt market. SEBI proposals follow a budget announcement by Finance Minister Arun Jaitley. Earlier, RBI also asked large borrowers to raise a portion of their incremental funds from the bond markets.
Indian corporate bond market is under-penetrated with low trading volumes. SEBI mandating large corporates to borrow from the bond market will be a major step towards a liquid and vibrant corporate bond market and it will also reduce reliance on banks to finance corporate borrower needs.
Applicability of Framework- The framework shall be applicable to any listed corporate except for scheduled commercial banks, which have an outstanding long-term borrowings (borrowings which have original maturity period of 1 year or above) of Rs 1 billion or above and has a credit rating of AA and above. Lower-rated corporates have been exempted from the framework for now but going forward SEBI will assess the capacity of the bond market to absorb even lower rated issues and the threshold will change to A from AA.
Bank Financing Vs Bond Financing – If we will look at Chart 1, it will be easy to understand why regulators are pushing big corporates to access more of their borrowing requirements from the bond market.
In last 5 years share of bond market has seen a steady growth. In FY-2016-17, 51% of total borrowings came from bonds compared to 37% in FY-2012-13 and in FY-2016-17 bond market financing overtook that of bank financing. However, the majority of the issuances is skewed towards credit rating of AA and above(Chart 2).
One of the key reason behind this skewness is institutional investors, which largely invest in highly rated papers. To overcome this situation, in Budget 2018, Finance Minister announced most regulators permit debt securities with the AA rating only as eligible for investment. It is now time to move from AA to A grade ratings.
Why SEBI want this Framework– The ultimate objective is to reduce the concentration risks on bank balance sheet. Second, to maintain credit discipline. Markets price credits efficiently, punish issuers who do not take care of their balance sheet and reward issuers who do take care of their balance. A default tag can haunt companies for years, while loans are tagged as bad only after payments are three months overdue and are upgraded once dues are cleared.
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