Non-banking finance companies (NBFCs) engaged in auto financing are hoping that banks requirement to meet priority-sector lending targets by March will give a much needed fillip to the auto financing business.

Typically, auto loans are converted into financial securities and sold to banks. This ensures that auto NBFCs do not carry the risk of default on their books. At the same time, since they get their money back immediately, they can go out in the market and lend again.

The securitised paper was typically purchased by banks as a part of their priority sector lending targets. However, increased caution in the financial markets since October led to a liquidity crisis for NBFCs as banks refused to buy these securities. As a result, NBFCs do not have money to lend. The economic slowdown has also led to vehicle sales plummeting, and NBFCs have been literally out of business.

But as banks rush to meet their priority lending quotas for the financial year, NBFCs are hoping the asset-backed securities they issue against disbursed auto loans will finally have some takers.

Rajesh Mokashi, executive director at Care ratings, expects a renewal in interest within some banks for securitised debt from NBFCs "to fulfill their priority sector needs."

"Last year, this market was about Rs 35,000-40,000 crore but this year, it may be down to Rs 20,000-25,000 crore due to caution in the October-December quarter, but that diminishing interest is reviving. There have been 7-8 deals already done by NBFCs," he added.

These deals are bilateral between banks and NBFCs. It gives the bank access to priority sector loans without having to work on the servicing. For NBFCs, it means easy recyclable money. NBFCs for now are dependent on banks because mutual funds, another of their clients for this paper, have stopped looking at it.

Mutual funds used to invest in this paper for their fixed maturity plans, but a severe liquidity crunch in October brought some of them to the brink of bankruptcy. The crunch was mainly because large companies, which had invested huge money in these plans, pulled out citing needs of working capital.
V Ravi, chief financial officer, Mahindra Finance, the non-banking vehicle financing arm of auto company Mahindra & Mahindra, said the slowdown for NBFCs continues because mutual funds, the main buyers of these securities are not in the market anymore.

His company has already done 2-3 such deals in the last one-and-a-half months with banks, he said. "Banks want to increase their portfolio and so they buy these loans, some of which may come into priority sector," he said.

Sanjay Chamria, vice-chairman and managing director at Kolkata-based Magma Leasing, said the government stimulus package has provided some liquidity and currently there is an increase in inquiries for some of these securities from public sector banks. r_joel@dnaindia.net

Joel Rebello DNA