ET Intelligence Group: The din is getting louder over the need for a stress test for the non-banking financial companies (NBFCs) sector amid the crisis at Dewan Housing Finance Corporation (DHFL).

The lack of confidence in NBFC financials has led to widened credit spreads in the bond market. The annual result of DHFL revealed that chinks are emerging in non-developer loan portfolio, which includes retail home loans, loans to small and medium enterprises (SME), and loan against property (LAP).

DHFL has reclassified loans of Rs 34,800 crore through fair value method and recognised a loss of Rs 3,190 crore.

Besides this, it has project loans of Rs 21,500 crore (equivalent to 17 per cent of AUM). A stress test for the NBFC companies has become necessary to restore investor confidence, particularly of foreign portfolio investors (FPIs), who hold 16-74 per cent stake in leading Indian NBFCs.

The diminishing confidence of investors has resulted in the wide divergence between the credit spread of retail and wholesale NBFCs. Under the stress test, the banking regulator calculates capital ratio of the financial service companies under several adverse scenarios.

The US Federal Reserve conducted a stress test for the banking sector after the financial crisis in 2008 to ensure banks have enough reserves. The latest disclosure by DHFL has raised doubt on the collection efficiency of NBFCs.

This could potentially show down banks buying loans from NBFCs under priority sector loans.

The securitization of loans from NBFC to banks rose to Rs 1.90 lakh crore in FY19 compared with Rs 0.83 lakh crore in the FY18, according to data compiled by Kotak Institutional Equities.

If banks slow down the securitisation portfolio, it will be detrimental to borrowing plans of NBFCs. Even on the project funding side, DHFL’s rising book size without proportionate increase in the disbursements has confounded investors.

DHFL disclosed that its share of developer loan rose to 39 per cent of the wholesale book in March 2019 compared with 22 per cent in December 2018. According to Credit Suisse, even at the short end of the yield curve, the yield gap on the NBFC’s commercial paper (CP) is 300 basis points (6.5-9.5 per cent). “While CP rates for some players like HDFC, LIC HF, Bajaj have come off (in-line with the moderation of G-sec yields), spreads for some players like Piramal, IIFL, JM Financial, Edelweiss remained elevated,” the brokerage added.