Two, three points; I think one is the NBFC space, there will be some shakeout in the sense that I think valuations had gone to an extreme there. If you look at the last 5 years, there was phenomenal stock market performance across the NBFC space, I think some of that is obviously unsustainable.
The good NBFCs, the Bajaj Finance’s, the M&M Finance’s, I think they are not going to have a problem. There will be 6 months of growth slowdown and they will be back and I do not think there is an issue at all.
However, there will be a whole bunch of smaller, maybe not necessarily listed NBFCs, or some housing finance companies (HFCs) which are more challenged and where growth will definitely slowdown significantly. There I think there will be a genuine valuation correction.
I think also what is happening now is an unambiguous positive for the private sector banks because you are going to see at the minimum increased deposit flow to the extent that money comes out of mutual funds or debt and equity funds and it will go in the bank deposits.
So that improves the liquidity which has been the biggest constraint for the private sector banks. Second is your biggest competitor on the asset side which is NBFCs, is weakened.
So, I think the financial services space is still a good space to be in. I think there will be some reallocation of performance, in the sense I personally believe that corporate banks are going to come back partly because FY19 should be the last year of very heavy provisioning for the ICICI’s, the Axis, the big private sector corporate banks.
So, financial services I like, but I do not think NBFCs are going to be the market leaders like what they have been for the last 4-5 years. I think that was a unique period in time where you had very good macro, very low interest rates, very easy liquidity, significant flow into debt and liquid mutual funds allowing access to debt funds which the NBFCs did not have, and a huge runway space left open because the PSU banks cannot lend because of prompt corrective action (PCA) and stuff like that. I think in that environment the NBFCs were able to fund and grow at 30-35 percent per annum for 5 years.
I think investors and the management of the NBFCs themselves have extrapolated this going forward, I do not think that is sustainable. The whole pack is not going to go at 30-35 percent, one or two may, and what you are seeing is a valuation correction which I think is permanent for a lot of NBFCs.
The average NBFC which was trading at 3-3.5 times book, the average NBFC which was being quoted by private equity fund, people were leaving their jobs and raising money and getting 3 times book, that type of stuff is not sustainable.
So that is not going to continue. So I think the leadership is going to change in financial services.