Easing yield spread indicates better liquidity for higher-rated NBFCs

The spread between AAA rated non-banking finance companies (NBFCs) and the 10-year benchmark government security is on the downward trend, indicating better liquidity conditions for higher-rated NBFCs.However, the Reserve Bank of India’s suggestion to introduce a liquidity coverage ratio (LCR) for these NBFCs is likely to increase their cost of doing business.The difference or spread between the top-rated NBFCs and the benchmark government security yield has come down to 137 basis points at the end of May from 146 basis points at the start of April and 168 basis points in March. One basis point is 0.01 percentage point.Though this difference is still higher than the 75 to 85 basis points difference in normal times, the indication is that the liquidity situation has improved.“The situation has improved. A few months ago, the market had no inclination to buy NBFC paper, but now government-backed NBFCs and higher-rated corporate NBFCs are clearly in a better position and that is what is reflecting in the spreads,” said Naveen Singh, senior vice-president at ICICI Securities Primary Dealership (ISec PD).Expectations of a further rate cut by RBI due to slowdown in India’s growth rate, a likely increase in government spending after the elections and lower global crude oil prices are seen supporting easier liquidity for NBFCs.However, NBFCs outside the highest rated bracket will continue to face challenges to access money.Stricter RBI guidelines for NBFCs will also increase the cost for business for these companies.“The RBI draft guidelines for NBFCs make these regulations closer to the ones for banks. It will increase the cost of doing business for NBFCs. So, yes, AAA NBFCs are in a better position but a lot of others will not find it easy,” said Ashish Vaidya, head of trading at DBS Bank India. In its latest guidelines, the RBI has proposed introduction of LCR for NBFCs with asset size of more than Rs 5,000 crore. LCR is the proportion of high liquid assets which can be used to meet urgent short-term requirements.From April 2020, NBFCs will have to maintain a minimum of 60 per cent of LCR as high liquid assets which will be increased step-by-step to 100 per cent by April 2024, RBI said last week in its draft guidelines.The regulator has also suggested changes to the asset liability management (ALM) of NBFCs to reduce their reliance on external borrowings.

from Economic Times http://bit.ly/2QI3B5Y