It was another day of huge selling on the stock markets on Monday; stocks of non-banking finance companies (NBFC) were among the worst hit, even as the regulators as well as the finance minister tried to calm any liquidity-related concerns.
The BSE Sensex plunged 1.5 per cent or 537 points to close at 36,305.02 points, with banks, NBFCs, automobile companies and fast moving consumer goods stocks among the biggest losers. The NSE Nifty50 saw its biggest single day percentage loss in six months; the benchmark index tumbled 168 points or 1.5 per cent to 10,974.90 points.
The sell-off in NBFC stocks, which began on Friday, continued on Monday, and comes in the backdrop of problems at one of the largest infrastruture NBFCs—Infrastructure Leasing & Financial Services (IL&FS); its unit IL&FS Financial Services had recently defaulted on payments on its commercial papers (CP). Market mood further turned sour after it emerged that a fund house had to sell CPs of Dewan Housing Finance Corporation Limited at a higher yield, raising concerns over the ability of NBFCs to meet their short-term liquidity requirements.
Shares of DHFL, which had tumbled over 42 per cent on Friday, rose 12 per cent on Monday, after the company reiterated that it had neither defaulted on any bonds or repayment of its financial obligations, nor had there been any instance of delay on any repayment of any liability. Kapil Wadhawan, the chairman and managing director of DHFL stated that the housing finance company held strong liquidity of about Rs 10,000 crore to serve its commitments and liabilities.
The Reserve Bank of India and Securities and Exchange Board of India late on Sunday issued a joint statement stating they “are closely monitoring recent developments in financial markets and are ready to take appropriate actions, if necessary.”
Finance Minister Arun Jaitley also sought to allay market concerns. “The government will take all measures to ensure that adequate liquidity is maintained/provided to NBFCs, the mutual funds and SMEs (small and medium enterprises),” he said. However, the assurances failed to lift market mood.
Even as DHFL shares rose, investors continued to sell other banks and NBFC stocks. Housing Development Finance Corporation, Can Fin Homes, Indian Bank, L&T Finance Holdings, PNB Housing Finance, Indiabulls Housing Finance, Indostar Capital and Edelweiss, all fell 6 per cent to 8 per cent. State-owned Central Bank of India's shares fell over 17 per cent.
Analysts say NBFC stocks have been under pressure as short-term liquidity concerns in the market remain. Selling CPs at a higher yield will lead to pressure on their margins, analysts add.
“Post recent events in debt markets, mutual funds and other debt market players are likely take a more measured and cautious stand on NBFCs,” said Nischint Chawathe of Kotak Institutional Equities.
The analyst, though remains bullish on the sector and said well-run NBFCs with proven business models and those with a strong retail focus, may not be affected much. He also feels that NBFCs, which have strong parent firms like Aditya Birla Finance, Bajaj Finance, Cholamandalam and Mahindra Finance would also continue to get support from debt markets and banks.
“More importantly, underlying business trends in most asset classes (commercial vehicles, rural auto and retail housing) have been robust over the past few quarters,” he added.