MFs prune stakes in NBFCs and HFCs

Mutual funds have reduced their stakes in most of the non-banking finance companies (NBFCs) and housing finance companies (HFCs) in September. The trigger for these exits was the defaults in repayments by group companies of Infrastructure Leasing & Financial Services (IL&FS). The subsequent ratings downgrades led to fears of a contagion in the sector.

The mutual fund houses were concerned over the asset-liability mismatches among NBFCs, which led them to prune their stakes in these companies. Some of the NBFCs from which fund houses offloaded their stakes include Indiabulls Housing Finance, L&T Finance, Shriram Transport Finance, Reliance Capital, among others.

The fund houses sold their stakes in these companies because these companies have long term loans in their portfolios, which are usually funded by short-term borrowings. The rising interest rates also raised the cost of borrowings of the NBFCs and, as a result, it was feared that this could lead to liquidity crunch due to asset-liability mismatch. The analysts downgraded the earnings estimates for the NBFCs as they expect the NIMs of NBFCs to decline due to increase in cost of borrowings.

These negative cues for the sector saw the stocks of these NBFCs declining by 14% to as much as 60% in September.