HDFC’s merger with HDFC Bank has opened up approximately Rs 1.5 lakh crore in bank limits for other non-banking financial companies (NBFCs) and housing financiers, according to analysts. The Reserve Bank of India (RBI) sets limits on how much exposure banks can have to a single NBFC and an NBFC group, with a cap of 20 percent of their Tier 1 capital for a single NBFC and 25 percent for one NBFC group.
As of March 31, 2023, HDFC Ltd had total borrowings of $69.14 billion, with term loans from banks accounting for 23 percent, equivalent to around $15.9 billion or Rs 1.5 lakh crore. Analysts note that this exposure of HDFC Ltd to the financial system no longer falls under the NBFC/HFC classification. While this may not necessarily reduce the cost of funds, it significantly increases the amount of money an NBFC can raise from banks at the same cost.
Foreign brokerage firm Nomura sees this as particularly positive for Bajaj Finance and its housing finance subsidiary Bajaj Housing Finance Ltd. They highlight Bajaj Finance’s well-diversified liability franchise, its AAA rating, strong parentage, prudent asset-liability management, and a strong track record, which have led to reduced funding cost differentials with large banks over recent years.
An experienced banking analyst suggests that funds will be readily available to NBFCs with a proven ownership and track record, emphasizing the importance of solid promoters for banks.
Currently, bank lines constitute 30 percent of Bajaj Finance’s liability mix, 49 percent of Cholamandalam’s, and 24 percent of Shriram Finance’s. Non-convertible debentures make up a significant portion of their liability mix as well.
The demand for NBFC paper, including commercial papers, is expected to increase as demand exceeds supply, especially after the HDFC merger. This could lead subsidiaries like Shriram Housing Finance, Chola Home Loans, and Sundaram Home Finance to aggressively expand lending as they receive more capital.
LIC Housing Finance is also expected to benefit due to increased market share and borrowing limits as it is owned by LIC.
Looking ahead, Axis Capital predicts that the impact of rising interest rates will become fully evident in FY24, after which NBFCs’ net interest margins (NIMs) are expected to stabilize with a positive bias.
While there are no major challenges on the asset quality side currently, analysts are becoming cautious about the rapid growth in unsecured loan books.
For now, most brokerages believe that NBFC valuations are comfortable as they focus on diversifying their loan books and developing granular businesses with digital capabilities.
