Non-banking finance companies (NBFCs) in India are going through a rough phase following defaults by once a bluechip infrastructure lender, Infrastructure Leasing and Financial Services (IL&FS), on short-term debt obligations. The liquidity crunch in the sector has created tensions between the Reserve Bank of India and the government. It may be noted that the government is willing to ease the liquidity crisis afflicting financial markets in the country by pushing the central bank for easier credit flow, while the RBI is arguing that the sector has access to enough money through normal channels.
NBFC sector crisis
Debt-ridden IL&FS, in which various corporates, as well as mutual funds and insurance firms, had invested through short-term instruments like commercial papers and non-convertible debentures (NCDs), has been defaulting on its several debt-obligations since August. IL&FS’ borrowings from banks and financial institutions adds to nearly Rs 63,000 crore as per the balance sheet of 2017-2018, according to the Ministry of Corporate Affairs (MCA).
There are concerns that many NBFCs could have their funds stuck in IL&FS debt instruments. Reportedly, approximately Rs 2 trillion ($27.23 billion) of NBFC and HFC debt is due for redemption by the end of December. Also, funding costs of NBFCs are likely to go up and could lead to a sharp decline in their margins.
What was the fund source of NBFCs?
NBFCs were the largest net borrowers from the financial systems with gross receivables of around Rs 419,000 crore and gross payables (loans) of about Rs 717,000 crore in March 2018. According to the breakup of gross payables, the highest funds the NBFCs received were from banks (44%), followed by mutual funds (33%) and insurance companies (19%).
Is it because of banks, the biggest lenders to NBFCs?
Banks are the major resource avenue for NBFCs. After defaults by IL&FS, both public sector and private sector banks almost stopped lending to NBFCs and housing finance companies (HFCs), adding to worries ahead of the festive season. An asset-liability mismatch in the operations of NBFCs such as IL&FS is a fundamental issue, which means that these firms raise capital from the markets for 3-5 years and lend for longer tenures – 10-15 years. Now, defaults in such a scenario will keep potential investors away from the debt instruments of companies in the space, The Indian Express reported.
On the other hand, when the interest rates are rising, margins of NBFCs came under pressure and raising capital became tough. According to banks started cutting exposure to NBFCs since April 2018 in the wake of the huge bad loan, which led to a 4.6% drop in their exposure to the sector.
What did the RBI do to provide liquidity?
Last month, the RBI announced to inject about Rs 40,000 crore into the system in the month of November through the government securities to meet the liquidity demand ahead of the festive season. In October, the central bank had already injected Rs 36,000 crore through open market operations. On the other side, the sector and the government is pushing to open a special liquidity window to meet the funding needs of the sector. However, the banking regulator was of the view that such as move could be misused as it will have to provide funds to every company approaching it for funds, saying there is adequate liquidity available for the industry. Meanwhile, the State Bank of India also proposed to buy good quality assets worth Rs 45,000 crore from NBFCs.
Going forward, NBFCs from here
The ongoing liquidity situation for NBFCs may remain tight. Also, there could be higher borrowing costs, given the recent adverse sentiment in the bond market. On the other side, the central bank may also tighten the norms for the sector, in order to bring these companies almost on par with commercial banks in terms of regulation, The Indian Express reported.