Sebi Tightening Sectoral Caps For MFs Will Impact NBFCs

Market regulator Securities and Exchange Board of India (Sebi) tightening sectoral caps for mutual funds will impact NBFCs over the medium-term, a study conducted by Kotak Institutional Equities revealed. On Thursday, Sebi Chairman Ajay Tyagi presided over a crucial meeting called on to take up and find out a solution for the ongoing liquidity crisis plaguing the mutual funds, NBFCs and some other Housing and Finance Corporations.

“SEBI has reduced sectoral limits for mutual funds’ investment in any single sector to 20% from 25% earlier. This will directly affect their investments in NBFCs. The regulator has also reduced the additional exposure limit on HFCs to 10% from 15% earlier. It has however provided for added 5% limit for securitized debt backed by retail housing loans and affordable housing loan portfolios,” said M B Mahesh, Senior Analyst at the Kotak Institutional Equities. 

According to Mahesh, at present the total cap for mutual funds to non-banks is 40% which includes 25% to NBFCs and 15% to HFCs. This will now stand reduced to 30% (20% to NBFCs and 10% to HFCs) with additional 5% for retail or affordable housing securitised loans. “However, the timeline for implementation of this regulation is not clear,” he said. The market regulator has also mandated investments only in listed Non Convertible Debentures (NCDs), which is mostly the case, and listed Commercial Papers (CPs). This norm will however be implemented in a phased manner, the finding said.

Lower sectoral cap for MFs to affect financial flexibility

Apart from that, the lower sectoral cap for mutual funds will affect financial flexibility. MF’s current exposure to NBFCs, HFCs stands at 28% is broadly in line with the revised cap prescribed by SEBI. However, lower sectoral limit will affect medium-term financial flexibility of all NBFCs. MFs or debt investors are anyway cautious, preferring retail NBFCs with strong parentage; most NBFCs have anyway increased bank borrowings. “In light of liquidity challenges and concern in wholesale NBFCs, we remain cautious on the sector even as stable asset quality in most retail segments, detailed in RBI’s FSR, reinforces comfort on retail players,” the research said.

NBFC exposure declines over past few months

Current NBFCs exposure has broadly been in line with new cap. MFs exposure to non-banks (including PFCs and RECs) was about 33-39% of its debt AUMs. The ratio declined to 36% in May 2019 from 39% in September 2018. Excluding PFCs or RECs, the ratio was 28% in May 2019, in line with the new effective cap of 30%, according to the research paper. “Within this, the exposure to NBFCs was 18% and HFCs was marginally higher than the new cap at 11%.”

MFs have been selective 

Mutual funds have anyway been cautious in lending to NBFCs over the last few months. Unlike initial fears, the mutual funds have been significantly rolling over debt for NBFCs. Total exposure to NBFCs (including HFCs, PFC and RECs) declined marginally to Rs 4.8 trillion in May 2019 from Rs 5 trillion in September 2018. While CPs declined sharply to Rs 1.9 trillion from Rs 2.4 trillion during this period, NCDs increased to Rs 2.9 trillion from Rs 2.7 trillion. Mutual funds have been consciously slowing down exposure to select NBFCs that have large wholesale and real estate exposure in light of fears of bad loans and liquidity in these segments.