MORE BORROWING,MORE DEFAULTS,MORE RESTRUCTURING

Does getting a few more return or asking for a few more return is termed as capital punishment for an investor? It seems like that under the current scenario.   Do we all should be prepared for DHFL and Yes Bank type fiasco more in the coming days?   Corporate Governance, Fraud, attachment of asset to pay Bond and FD holders are these the new norms and way of living for investors and society?  Will this Covid -19 impact will lead to many more such cases?  Consumption down, borrowers have lost a job, repayment under dark, unlock, lock, low-income segment struggling and all last but not the least the depth of the discounting by market and by investors involved. Well yes is the reverted form the trend of the market.  Many NBFC will come for borrowing and we will see a flood of borrowings to happen. Why they need money? Just to meet their commitments to MF and Banks, Bonds and NCD's.

Does raising of money means that the NBFC problem is over and they are better positioned.  How do they get approval from RBI and SEBI when their books are floundering?  They will take money from one pocket and pay to the other one.   Many NBFC will follow the merger in the coming years.  The small one will be 1st and then the medium ones will be the next. But we feel bankruptcy and merger at a low valuation where assets are discounted to  20% OR 30% OR 50% value. Did we all calculate the amount of restructuring which will be required for the NBFC space for all the sectors? Yes, we find enough of the reasons for more hiccups but before that few questions in everyone’s mind seeking revert. Well, Edelweis is the 1st one to exit the wholesale. 

It was quite surprising to hear that why a risky instrument like AT-1 Bonds was allowed by RBI and SEBI.  These bonds were sold by “YES BANK” as super FD. Well, substantial bonus and targets achieved by miss-selling the products by the management.  The Perpetual Subordinated Basel III Compliant Additional Tier I Bonds issued by the bank for an amount of Rs 3,000 crore on December 23, 2016, and the Perpetual Subordinated Basel III Compliant Additional Tier I Bonds issued by the bank for an amount of Rs. 5,415 crore on October 18, 2017, have been fully written down.  The money belonged to the Taxpayers.  Getting a few more returns is not a crime.

Why these two Bodyguards of the Indian financial system kept silent when the product was offered? Further, if the bondholders lose money in such an instrument as they have been termed as liability then why these products are not banned. Why after the lesson of GFC these types of products are floated? Why RBI and SEBI did not intervene when all Banks Financial statements, reporting are submitted with them. Why only the common people have to suffer.  Why Co-operative which was having such a large pool of deposits were kept outside of RBI guidelines?

They will be a beeline for NBFC having sell tag line. The reason being the business model is now collapsing and the current consumption, consumer, moratorium and lack of working capital is the killing. Forget about the ratings, the existing debt and bond commitment itself turn out to be a nightmare. The profitability of NBFCs is also likely to get impacted because of additional provisions related to COVID-19.  NBFC space has been spending relaxed days and RBI did not bother to grip them when they were scaling their business and Banks failed to scale up. Now, these rules and regulation have introduced at such times when pandemic has impacted the business. Even RBI gives them the support of liquidity the problem is that most of the NBFC will have a wide gap in Asset- Liability Mis-match.  

Even the co-operative Banks are over-leveraged and they have lost the trust of the purpose of the Banks. The market has a tendency of forgetting things very soon but when things happen in quick succession then people don’t forget. PNB bank reports Fraud of DHFL to the tune of Rs 3688. What about those sermons provided to the investors that one should know where they are investing & rating. Where is the one who gave a rating of AAA or AA? Where are the auditors who did concurrent and statutory audit? Well, we have forgotten everything.

DHFL the one who gave loan where Banks have rejected the proposal. Then Yes Bank and PMC bank -one of the prestigious decorated Bank. Well, when we remember these two institution name we immediately get these words of Shakespeare in Mind – “Gilded tombs contain worms”.

The biggest risk belongs to the Banks now as Mutual Funds position have come down for the NBFC sector. NBFC borrowing from MFs has been in a declining mode, while banks outstanding advances to NBFCs are increasing in April 2020. Banks’ outstanding to NBFCs registered the highest growth of 48.6%% from September 2018 to April 2020.  The biggest question is that does a Moratorium to NBFC will save them from the H2 Fy-20 or FY-21 issues. If we look at the job market we find that the low-income/self-employed categories are the worst hit by the shutdown – having no similar relief available on the liability side will stretch ALMS significantly.

Now a question will come up how one will know how an NBFC is positioned in the pandemic. Well, the liquidity issues threaten to morph into a solvency problem, and this should be reflected in higher traded spreads for the NBFCs. Every sector every company is stretched under the current circumstance. Expected loss provisioning” likely to become questionable under current market stress; expect NPLs to go up across a range of sectors. How long and how far these companies can take the hit and keep moving. Those who are thinking that NBFC has collateral against the funding well in case of default how much collateral they will be holding and who will buy those collaterals from them so that these NBFC get liquidity in hand.

DHFL investors and fixed deposit holders who are the senior citizen class of people have spent nightmares and even few passed away when they heard the story of the breakdown of DHFL. When they found that their hard-earned money is blocked and they will not be able to get back their money on an immediate basis and they have to stand in a long queue to fill-up the form and get their own money back. Later again these companies under new management will run for the race of raising capital from the market.

What about the real estate sector and how much more asset can be taken over by the NBFC? Higher NPLs in developer financing in 2020/21 is almost guaranteed at this point, with risk on under-construction mortgages. Most NBFCs have financed these developers via mezzanine structures hence the risk is beyond measurement. Rs2.5tn loans are outstanding from the Real estate sector and we have a little bet on getting this mammoth size to be resolved and restructuring will not help.

As a common investor with limited knowledge of products and looking for some protection of capital and few more earning compared to the Bank FD invest in these companies. Where does the protection of capital concept stand today in society? There is no point that whether the Assets of Wadhwan are clubbed and sold off to pay the Bond or FD holders.It seems that corporate governance, RBI and SEBI all are just like those police who come to rescue at the last moment of a Hindi Movie.