What is your take on banks? They have been some of the underperformers. But since the Budget, it has been a one-way ride for them. Also, for NBFCs, while a revival of the real estate market may help of HFCs, we have this draft paper circulating on regulation of NBFCs. Can that be an overhang?
Higher regulation is a given for NBFCs, whether you like it or not. We are going to get more deeper regulation. Some parts of the ecosystem where there was no regulation — for instance lending to IPOs and HNIs – will get covered. We have had a fairly large set of NBFCs which borrow in the bond market for seven days at 7-8% and lend to HNIs in crores to apply for IPOs. Each HNI can get something like Rs 5, 10, 15, 20 crore or even more. Banks are regulated, they cannot give more than Rs 10 lakh of loans in such cases. But NBFCs are not. So there is a regulatory arbitrage over there. When the new rules come in, they are likely to crimp that solid profit margin that NBFCs earn within a relatively short time.
A lot of NBFCs play this game. There is also a bunch of others in the housing sector now, and it is not necessarily that a housing boom, if it comes now, will benefit them. Banks are getting really aggressive;
results showed how it is really pushing retail housing. They have the lowest cost of funds in comparison with most NBFCs. So, there are going to be challenges on how you maintain asset quality, when you have so much competition, and when banks have much better balance sheets now than they had about four-five years ago.
In the financial space, the worst in terms of asset quality is yet to come. We have not seen the real damage; we are seeing pro forma numbers of NPAs because of a Supreme Court order. Like the RBI has said most of these NPAs will come to the fore during the July-September quarter or so. We will actually see the real impact of Covid, and the pain of the MSME sector impacting banks and NBFCs later this year. I would still say there is going to be two layers of NBFCs, the good ones and the not-so-good ones. You will see this, obviously, both in stock prices and in results. The ones that continue to get better in terms of asset quality and growth are the ones going to perhaps form the good part of the NBFCs going forward. And the ones that are not good are going to suffer in terms of their inability to raise both equity and debt towards the later part of the year. So I would play this space a little carefully. We are actually taking baby steps here: while banks have done really well, we should wait for the Supreme Court hiatus on NPAs to be removed to see the real picture.