[T.S.R:17319] RBI Changes The Rules Of The Game-NBFCs Hit Hard

The Reserve Bank of India (RBI), in its notification dated 3 May '11, has indicated that bank loans to NBFCs excluding micro finance institutions (MFIs) will not be classified as priority sector lending. Loss of priority sector status on bank borrowings would increase the cost of funds for NBFCs. RBI is likely to issue separate guidelines for assignment/securitization. Any substantial changes due to the new regulation could considerably impact the profitability of asset financing NBFCs.

n       Bank loans to only MFIs to be classified as priority sector lending. The RBI, via its notification, has indicated that bank loans to NBFCs ex MFIs (that meet all criteria defined by the RBI) will not be classified as priority sector lending. We believe RBI intends to monitor the end-usage of borrowed funds under priority sector lending. MFIs' eligibility for priority sector borrowings from banks entails 85% of their total assets meeting the RBI requirement of qualifying assets.

n       Cost of borrowings to increase. Priority sector borrowings account for 15-20% of total borrowings of Shriram Transport Finance (SHTC) and M&M Financial Services (MMFS), for whom we expect cost of borrowings to increase due to loss of priority sector status. However, as per their managements, priority sector borrowings are either at normal bank rates or at negligible differential (between priority and non-priority borrowing rates), which is likely to be passed on, hence protecting NIMs.

n       Separate guidelines for assignment/securitization. As per its notification, RBI will issue separate guidelines for securitization of priority sector advances. Borrowings via securitized loans accounts for ~45%/~17% of total borrowings for SHTC/MMFS. Any substantial change in this due to the new regulation is likely to largely impact profitability (~500bps/~100bps fall in RoE for SHTC/MMFS).

n       Regulatory uncertainty to be an overhang on stock price performance. As impact on profitability would be large for the aforementioned NBFCs (more for SHTC), we believe that the current regulatory uncertainty would be an overhang on stock price performance in the short term. However, SHTC and MMFS are good long-term plays on the back of increased domestic economic activity and rural prosperity; given their matchless business models in terms of parentage reach and expertise.

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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