Liquidity & Mutual Fund Fixed Income Risk

Those who thought that Equity is the toughest subject and Fixed Income is the easiest well the current circumstances are capable enough to change your decision and even make you have sleepless nights. The Fixed income market is going to get into a Tsunami type scenario as the outlook derived on the macro factors does not provide any comfort. Being a Fixed Income industry specialist it seems a wrong job has been picked up. The Mutual Fund Debt space is also into the troublesome area after the Franklin Fiasco. Liquidity and crisis fall over on a chain basis are going to create a major problem for all financial institution with defaults risk getting amplified.

After the Indian banking system failed to grow the NBFC came into rescue and when the NBFC did not get the funds they went to MF to get the funding. This chain of history is now the beginning of the nightmare under the COVID Lockdown phase.  Extended lockdown and negligible demand is the pain in the shoe.

6 months Moratorium leads to a crisis for working capital for the NBFC and MFI space. Well the ATMANIRBHAR package does not save the NBFC and MFI from their problem. This will spook the problem for liquidity for the NBFC and MFI who will be scrambling for working capital and also Asset-Liability a mismatch cannot be avoided. The Rs.300 billion offer of funding is for buying short term papers and available to investment grade entities.

 The duration of buying the short term is less than 90 days and only for NBFC which are covered under the investment grade. The round of funding Rs450 billions of partial credit guarantee scheme for NBFCs and MFIs have been kept for PSU where private banks are not a part of the game. Now PSU banks will be very careful to take the plunge and even will be selective. The law itself has a flaw and does not protect all stakeholders. The crunch for liquidity in terms of refinancing is a major issue. NBFC’s and MFI’s will have to use internal cash a may face default risk where the rating is below. But the chain of impact cannot be reduced.

Refinancing of debt commitment will be the tip of the iceberg where the fiasco of the financial market will begin.  It has been found that to the tune of Rs640 billions of borrowings for 'AA'-and-below-rated NBFCs are coming up for refinancing from April to December 2020.  Now digging further we find that around Rs220 billions of bond repayments due over the next 12 months.  Now downgrading of rating will make things more difficult. ICRA has already downgraded Rs7 trillion of debt in FY20 (vs Rs3 trillion in FY19).  Well before we move ahead we need the find where the downgrade is happening up. It’s being found that financials makeup nearly two-thirds of this debt, followed this the next downgrades in the commodity conglomerate, Agri and real estate sectors have contributed meaningfully to such debt o/s with non-financials.

Falling demand, extended lockdown, depletion of capital and significant delay in recovery of the economy will place significant pressure on meeting commitments. Corporate bond market with a medium and low rating will be avalanche for the fixed income market. The financial sector downgraded comprises 66% where the rest is non-financial. Further bond market outstanding is less than Rs9 trillion of bonds (issued by both financial and other corporates). This will be heading for maturity in the next 18 months and constitute ~20% of outstanding corporate bonds. Out of this, it can aid that two-thirds of these bonds are issued by Financials (banks 10% and NBFCs 53%) and the rest by other corporates. To the tune of 63% belongs from NBFC and Banks where NBFC holds around 90%.

NBFC, HFC and MFI are under the biggest risk of default due to the economic situation arising from lockdown and negligible demand for products.  The depth of commitment and fiasco erupts from this place. AMCs having the largest exposures, where they are being net lenders for Rs. 8.8 trillion as of September 2019, with NBFCs, HFCs and private banks the major borrowers.  The risk of downgrading followed with liquidity crisis and corporate balance sheets getting hammered it will risk managing the fiasco.

Digging further it is being found that MFs have an asset base of Rs13 trillion of debt out of which the prime concern is Rs10.5 trillion holding incorporate paper, which accounts for 20% of total o/s paper. They have Rs6 trillion of financial paper, with an exposure to the tune of  Rs2.3 trillion

with NBFCs and HFCs on the other side is having  Rs1.5 trillion to banks and Rs2.2 trillion with other financial institutions and rest in gsec.

 The AUM of credit risk category has come down by 50% but over the next three months, it is found that of Rs2 trillion in debt which belongs form NBFCs/HFCs and banks but the leftover tail is enough to kill. Banks NPA management and simultaneously the MF industry lending hands amplified the depth of the risk for the investor money.  In the last 18 months, we have witnessed significant carnage on the debt space where corporates defaulted due to liquidity crisis and the same is expected to start another round of carnage.  Fresh lending will not happen, managing the commitment is herculean and the risk default incorporate space across non-financial and financial cannot be ignored. Banks are also been selective in granting moratoriums to NBFCs.