In This Issue:
- Editor’s Column – NBFC’s are as Important as Banks to the Economy Today
- L&T Credit Risk Fund – Portfolio Analysis
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – NBFC’s are as Important as Banks to the Economy Today
NBFCs have emerged as an important alternate source of credit in the Indian economy. Given the sharp rise in asset books of NBFC’s. the access to funds for NBFC’s too is important and credit markets are playing a large role in NBFC funding, which in turn is fuelling a consumer boom leading to the economy benefitting from higher aggregate demand.
NBFC’s form a very large percentage of bank, mutual funds, insurance companies and provident fund source of assets. Family offices, indiviual investors and corporate treasuries too are investing directly into NBFC bonds or their securitised assets.
Given that NBFC’s are forming a large part of the asset base for lenders and investors, it is vital that the NBFC’s themselves and the regulators increase vigilance on the sector. NBFC growth has been multifold over the past few years and in such boom times, it is inevitable that there will be over lending and collapse thereafter for many of the NBFC’s, which in turn could derail rest of the sector’s growth.
In FY19 April-August period, private placement of NBFC bonds (Listed and unlisted) was at Rs 1186 billion while in the previous year, same period. it was Rs 1319 billion. Private Placement of NBFC bonds was down 10% year on year. NBFC bond issuance was down comparatively as interest rates have risen and surplus liquidity has decreased over the last one year. In FY19, as per ICRA reports, incremental weighted average borrowing cost for NBFC is expected at 9.3-9.5%.
NBFCs are the largest borrowers in the financial system. Borrowing is a mix of loans, bonds and NCDs, CPs and Securitised instruments. Mutual funds are the largest holders of CPs at 87% of total outstanding, and domestic investors through mutual funds are indirectly lending to NBFCs.
Credit is a vital ingredient in the economic growth process. In India, due to NPA issues, bank credit growth has decelerated sharply in the last few years before start to pick up in 2018. On the other hand, NBFCs’ credit grew in sectors such as infrastructure, retail loans and services. NBFCs are important to Indian financial system by complementing and competing with banks and by bringing in efficiency and diversity into financial intermediation. The share of NBFCs in total credit given by banks and NBFCs together increased from 9.5 %in March 2008 to 15.5 % in March 2017. NBFCs credit as % of GDP has also increased at a steady pace and reached 8% in March 2017.
As per RBI data, The aggregate balance sheet size of the NBFC sector as on March 2018 was Rs 22.1 trillion. The sector witnessed a deceleration in share capital growth in FY18, whereas borrowings grew at 19.1%, which infers rising leverage in the NBFC sector. Loans and advances of the NBFC sector increased by 21.2% and investments increased by 13.4%. Balance sheets of nonbanking financial companies (NBFCs) grew on the back of credit expansion, primarily by loan companies, asset finance companies and investment companies. NBFCs’ consolidated balance sheet expanded with strong credit growth that was financed through higher borrowings. As per RBI data, bank credit growth was 6.2 % during the H1FY18 while NBFCs’ credit growth was 14.9% against 7.9% in H1FY16. This was driven by strong growth in credit to retail and services sectors.
NBFCs – Largest Borrowers in the System
As on March 2018, NBFCs were the largest net borrowers of funds from the financial system with gross payables of around Rs 7.170 trillion. A breakup of gross payables indicates that the highest funds were received from Banks (44% of total funds received by NBFCs), AMC-MFs (33%) and insurance companies (19%). Long term debt followed by Long Term loans and CPs were the three biggest sources of funds for NBFCs.
NBFCs mainly cater to sector specific financial needs covering retail, consumer and vehicle loans, micro, small and medium enterprises (MSMEs), large industry infrastructure and micro finance. A significant growth in credit to retail and services segments implies their increasing role in financial inclusion. Industry receives about 60 %of total credit by NBFCs, followed by retail, services and agriculture. In FY17, Within the sectoral deployment, retail credit increased at the highest pace on the back of consumer durables and credit card receivables.
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L&T Credit Risk Fund – Portfolio Analysis
L&T credit risk fund portfolio is quite diversified, it holds bonds of various sectors such as financial, power, media, metal, telecom, real-estate, roadways, oil & gas, port and consumer discretionary. Highest sector weight is in Financial sector at 37.44% (Financial sector includes Banks, Microfinance, HFCs ), followed by 16.25% in the Power sector ( Power sector includes Renewable energy, Transmission companies). The power sector is in stressed position but transmission sector is doing better when we compared with generation and distribution. L&T credit risk fund holds 4.1% in Jhajjar Power Limited (A+) which is in power generation, all other power investments are in the transmission sector or renewable energy sector.
Transmission & Renewable Sector Outlook
As per the Ministry of Power (perspective Transmission Plan for 20 years, 2014-34), it is estimated that North Region would have a deficit of 18.5-22 GW and South Region would have a deficit -13-19.1 GW. In order to meet this demand deficit, south region and north region will require to import power from surplus power regions such as the northeast region and west region. To cater the import/export requirement of various regions, CEA has planned number of inter-regional transmission corridors, which would result in the availability of inter-regional transmission capacity of 118 GW by Mar-22. As on date, the inter-regional transmission capacity stands at Mar 17 is 75 GW and therefore provides an opportunity for the transmission project developers.
India has planned to ramp up renewable energy capacity addition from 38.8 GW in FY16 to 175 GW by 2022. Due to its infirm nature and to provide stability to grid there is a requirement of dedicated corridors for renewable energy evacuation, which would lead to the requirement of new transmission projects
Indian renewable energy sector is the second most attractive renewable energy market in the world. The country ranks 4th in the world in terms of total installed wind power capacity. Installed renewable power generation capacity has increased steadily over the years, posting a CAGR of 9.29% over FY 08–18. India added record 11,788 MW of renewable energy capacity in 2017-18. The focus of Government of India has shifted to clean energy after it ratified the Paris Agreement. With the increased support of government and improved economics, the sector has become attractive. As India looks to meet its energy demand on its own, which is expected to reach 15,820 TWh by 2040, renewable energy is set to play an important role.
L&T credit risk fund portfolio has 50.14% of bonds with higer credit ratings (AA and above) while 37.3% of bonds are lower rated. Fund holds 13.84% in A+ rated instruments and 3.87% in A rated instruments.
L&T credit risk fund holds 3.3% in Syndicate Bank bonds, whose credit rating was downgraded recently, while it holds 2.8% in Hinduja Leyland Finance bonds, whose credit rating was upgraded recently.
Expese Ratio- 1.35% (direct plan), 1.90% (regular plan), L&T credit risk fund direct plan expense ratio is on the higher side when compared with its peers.
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