Frothy valuations, difficulty in raising funds from the bond market after the IL&FS episode, and existing growth and asset quality challenges suggest that there is more pain ahead for NBFCs. Many stocks may continue to feel the heat, which can worsen, if liquidity concerns of the sector are not addressed. Banks and NBFCs run into liquidity issues mainly because of asset-liability mismatches.
That is, their loans and borrowings do not come up for payment at the same time. Mismatches in the ‘up to six months’ bucket often provide early warning signals of impending liquidity problems. The annual reports of NBFCs for 2017-18 reveal that some players have a wide mismatch, with deposits and borrowings in the ‘up to six months’ bucket coming up for payment faster than their loans in the same tenure. Most of the NBFCs have seen stellar growth in the last two to three years, sufficiently funded by market borrowings and bank loans. But the recent events hitting the market sentiment can make it difficult for them to raise money from the bond market. Some of the NBFC stocks have already been correcting in view of growth challenges and rising delinquencies. The recent events have only exacerbated investors’ concerns.
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