Mutual funds up NBFCs exposure to 14% of their total debt assets under management

http://www.moneyspidery.com/2012/02/07/mutual-funds-up-nbfcs-exposure-to-14-of-their-total-debt-assets-under-management/

MUMBAI: Mutual funds have been a key source of funding for non-banking finance companies (NBFCs) of late. Funds have raised exposure to short-term securities issued by NBFCs to 14% of their total debt assets under management as on December 31 from 9.3% as on June 30 last year.

Analysts said these investments have enabled them to churn superior returns from their short-term schemes, but warn that NBFCs, which raised money through debt papers of shorter tenure to lend to risky long-term projects, are skating on thin ice.

“Such large amounts of money going into NBFC debt issuances, irrespective of the rating, can give rise to systemic risks,” said Ashvin Parekh, partner and national leader, global financial services, Ernst & Young. “In addition to maturity mismatch, NBFCs using mutual fund money to fund risky businesses could compound the problem.”

Data collated by Mumbai-based Sarthi Advisors show the fund industry has more than Rs 50,000 crore worth of investments in short and medium-term NBFC issuances.

NBFCs usually issue three-month commercial papers to mutual funds and roll over the loan for longer time periods — often extending up to two years. NBFCs prefer raising money using short-term papers as these have better ratings than their long-tenured issuances.

“This practice is creating a serious asset/liability mismatch. Mutual funds will be in deep trouble if interest margins of NBFCs decline. Funds with high exposure to ‘asset-financing NBFCs’ are risking significant credit and liquidity risk,” said Deepak Sharma, managing director of Mumbai-based Sarthi Advisors.
Analysts said a portion of the money has made its way into the stressed real estate and infrastructure sectors, which have been starved of bank funding in recent yea- rs. A fixed income manager, on the condition of ano- nymity, said that there are a few fund houses with high exposure to ‘single’ issuers. “And some of these issuers have business interest in real estate as well,” the fund manager said.

While there are sporadic concerns about the quality of NBFC issuances, the fund industry has played down such worries. “Fund houses are taking all precautions while investing in NBFC issuances. We consider factors like capital adequacy, leverage ratios, portfolio mix and asset-liability ratio while investing in those papers,” said Laxmi Iyer, head of fixed income and products at Kotak Mutual Fund.

“We’re not really bothered about the exposure of an NBFC to any particular sector. There’s no ban on investments in any sector,” Iyer said, adding, “There’s no harm in investing in NBFC issuances, which are safe and generate better yields.

Debt fund managers said NBFC issuances fetch about 9-9.25%, about 40-70 basis points higher than bank papers and government securities.

Sunil Jhaveri, chairman of mutual fund advisor MSJ Capital, is also not worried about the high exposure of debt funds to NBFC issuances.
“The only point of worry is when there are specific instances of NBFCs investing the money (received from funds) in risky asset classes like real estate,” Jhaveri said. “Considering the current times, fund houses will be exercising extra caution while lending money to asset-financing NBFCs. I don’t think there’s a huge credit risk,” Jhaveri added.