Investors dumped shares fearing that proposed norms of RBI would impact profitability and growth and due to this non-banking financial companies correction has been extended till Monday.

Shares of Dewan Housing Finance Corporation (DHFL) tumbled 18.5%, extending its year-to-date (YTD) fall to 61.7%. Edelweiss Financial Services tumbled 13.7%, taking its YTD fall to 49 %. JM Financial, Magma Fincorp, and Shriram Transport Finance fell more than 10% each.

“The RBI said that it would look at measures to strengthen ALM at NBFCs to prevent mismatches. We await details but this could have negative implications for loan spreads and loan growth,” said Morgan Stanley in a note. “Every 1 percentage point shift in the mix of borrowings from commercial paper to long-term non-convertible debentures (NCDs) or bank borrowings could increase the cost of funding by 0.5 to 1 basis points, depending on the credit rating profile.”

Investors should prefer large lenders such as HDFC Ltd. who are positioned well in terms of liquidity. On Monday, Shares of HDFC Ltd fees 2.6% to Rs. 1670.

“With increasing regulatory scrutiny on ALM, it has expected that NBFCs to ‘normalise’ their borrowing profile that is migrated from opportunistic funding to more stable and sustainable funding. This would lead to a larger-than-expected increase in the cost of funds. We hope to have a twin impact on both margins and growth. We expect growth to taper for some of the fastest-growing NBFCs.

The brokerage cut earnings estimate for the current and next fiscal year by 4 to 7 % for NBFCs. It also decreased the price targets for NBFCs across its coverage universe by 8 to 27 % to factor in the cut in earnings and higher cost of equity.

JM Financial in a note said strong promoter-backed NBFCs and housing finance companies (HFCs) will get a disproportionate share of funding and competition from new and small NBFCs will come down massively.

It said broker-backed NBFCs like Edelweiss and HFCs with ALM mismatch DHFL, PNB Housing, Repco Home Finance will see growth slowdown.

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