The commentary around money market & the NBFCs :
Teacher: Can anyone prove that a cat has 3 tails?
S: Any cat has more tails than no cat
T: Obviously
S: And no cat has 2 tails
T: Yes
S: So any cat must have 3 tails.
Moral: You can prove anything in life if you want to.
Teacher: Can anyone prove that a cat has 3 tails?
S: Any cat has more tails than no cat
T: Obviously
S: And no cat has 2 tails
T: Yes
S: So any cat must have 3 tails.
Moral: You can prove anything in life if you want to.
Even in the press conference what the @RBI was referring to was to avoid an ILFS kind of a situation. It wasn’t indicating anything negative - that is if anyone’s read the text. ALM mismatch would affect the small marginal players not the ones who are the leaders in the space.
When the marginal players get killed it gets easier for the leaders to take up market share. ALM mismatch for a company is not a default program it’s a matter of choice. Yesterday one HFC raised US$200 mn through ECB and threw the ALM mismatch whatever it was - out of the window.
About the cost of borrowings HDFC which is another NBFC (the new four letter dirty word) has been around for 40 years, seen several cycles - not just survived but prospered from them also. Strangely, their ALM is showing a mismatch for now but they can set it right anytime.
As investors who have followed and made wealth from this sector for a decade we know when to hold and when to fold but the sector will remain robust and buoyant. Now let’s assume that the NBFC sector isn’t allowed to lend normally. There is a bigger chaos waiting to happen then..
Private banks are interested mostly in doing bulk lending to the deserving and the served. Has anyone worked out numbers for the proportion of Cars, Commercial Vehicles, 2-wheelers, Tractors, SME, MSME, washing machines, refrigerators, TVs, that are catered to by the NBFC space?
Are we thinking that a majority of the share in this space will be taken over by the banks just because have a cheaper line of credit. If credit slows down the GDP growth will go down to below 5%. I think that @arunjaitley and @FinMinIndia are well aware of this & so is the @RBI
One ILFS doesn’t mean the sector will fail. Just like one Satyam didn’t result in a collapse of the Indian IT space. And the NBFC space didn’t thrive on spreads. It existed because of cost of operations, easy of delivery, turnaround time and importantly loan recovery processes.
While the best of banks have a 45% cost to income the NBFC works on a cost to income of 15%. What matters is the RoA and RoE. Most of the frontline NBFCs beat the banks in the RoA and RoE that they generate. If it were not so HDFC would have merged with HDFC Bank long time back.
Spreads are just one facet of evaluation. It’s like saying this person has longer legs so he can run fast. But what if the long legs come with a cardiac problem? Banks have to maintain CRR & SLR, engage in priority sector lending for which they buy loans from the NBFCs.
NBFCs don’t have so many regulations and restrictions. I can go on and on but this is enough for today. People wrote obituaries during the 2016 demonitisation period and are doing so now. We have bigger issues at hand if this space slows down. And the @RBI is aware of that.
Please note that we have a vested interest in the top notch NBFCs both personally for us and the clients and this is no recommendation to buy at all. Just that the flood of queries I have received made me write this.
#TheThoughtfulInvestor
#TheThoughtfulInvestor
