By Ruma Dubey

The tide seems to have turned. Till 8th November, market shunned PSU bank stock, preferring to put their money in NBFCs instead. And from 9th, it remains the other way round – NBFC stocks are being pounded down to pulp while PSU banks have become reasons for a toast!

Blame it all on demonetization. In one swift and short speech by the PM, the fortunes of these two have changed. PSU banks are today flush with deposits; five times more than what it has seen over the past couple of years and NBFCs which thrive mainly on cash are currently coming to terms with the circumstances.

Banks have been able to scale up as they already had a digital presence but NBFCs which thrives on cash had till now felt no need to make a move towards digitization and that is what is hurting them today. Their fundamentals remain intact but the short term pain will be excruciating.

Small business and self-employed typically depend on NBFCs and less on banks for getting money as the former has lesser stringent rules when it comes to giving loans. With most suffering on account of no cash, loss of business and unemployment due to demonetization, they have no cash to repay the NBFCs and that is where we will see the entire pain this note ban drive.

The big slap will come on account of their Loan Against Property (LAP) model. Here, a secured loan is given against the property owned and the loan amount depends on the value of the property. NBFCs give 50-65% of the market value of your property as the loan amount. This loan is usually availed by the self employed and small businesses. The demonetization has sucked out all cash, leaving the business of the borrower itself in a lurch and to make matters worse, property value itself has taken a hit thus affecting the repayment ability of the borrower. LAPs form a big chunk of NBFCs business and this is the area where many fear delinquencies will rise.  As per a report from Edelweiss, LAP accounts for 51% of Capital First's loan book, 43% for DCB Bank, 30% for Chola Finance, 20% for Repco and 16% for Bajaj Finance. 

There is no denying the fact that demonetization has unsettled their normal mode of business and the markets are beating down the stocks because they fear that Q3 especially will see an unusual rise in bad assets or non-performing loans.

More vulnerable are the micro finance companies whose entire lifeblood – disbursements and collections are in cash. The fear is that they will be hit the worst. Bharat Financial or SKS Microfinance is a big loser on the bourses today as it has published its post-demonetization disbursal and collection numbers; they are pretty good but collection in Maharashtra and UP has been very bad and that is worrying the market.

Yesterday, it was Manappuram Finance which was amongst the top losers as it is mainly a gold financier and is expected to be a victim of the note bank drive due to inability of its customers to repay money taken against the gold.

Thus NBFCs will go through pain but this will be temporary. Q3 might be the worst and things could look up a bit from second half of Q4.