NBFCs stop lending due to tight liquidity

04 December 2008

Non-anking finance companies have virtually stopped lending in the retail markets, preferring to hold on to their liquid funds rather than get sucked up in the vortex of non performing assets.

While some like India Bulls Securities have adopted a wait and watch policy, others like Reliance Capital prefer to make selective lending for superior quality assets.

Last month Mumbai-based rating agency CRISIL released a report based on its research of 33 rated NBFCs, which account for around 30 per cent of market share.

The report stated that NBFCs' balance sheets have a significant asset-liability mismatch with more than 50 per cent of NBFCs' borrowings having maturities of less than one year, even while most of their assets have tenures of about three years.

Further, the dependence on mutual funds for short-term funding has been high: CRISIL-rated NBFCs' estimated borrowings from mutual funds have increased to more than 45 per cent of total borrowing as of 30 September 2008, from 30 per cent as on 31 March, 2006.

Looking for funds
Primarily, NBFCs have four sources of funds - non-convertible debentures (NCDs), term loans from banks, short-term commercial papers (CPs) and securitisation of assets.