IL&FS defaults: Finance companies to face liquidity crisis ahead of festive season; here is why

By: | Updated: October 9, 2018 9:08 AM

Meanwhile, stocks of few NBFCs took a hit on Monday after RBI's Friday announcement that it is mulling to introduce tighter guidelines for such entities to avoid rollover risks.

The current scenario is expected to put relatively smaller NBFCs under a lot of pressure. (Reuters)

Defaults by infrastructure major IL&FS on its debt obligations seem to have had a knock-on effect on non-banking finance companies (NBFCs) and housing finance companies (HFCs), and the government’s decision of takeover and fund infusion in the debt-ridden company has also failed to provide any respite. NBFCs and HFCs in India are facing a severe liquidity crunch ahead of the festive season as both private sector and public sector banks have stopped extending loans to them, in the wake of IL&FS defaults, the Indian Express reported citing industry sources.

Notably, banks have taken a back seat on risk-taking with most of the private sector banks are facing regulatory actions, while public sector banks are already too stressed.

“Since last Monday, we have seen banks completely stop lending to our HFCs and NBFC even though such loans are backed by mortgages. This is leading to a situation where we are cash-strapped and it may affect lending especially consumer loans ahead of the festive season,” a whole-time director of a financial service group, told the paper.

Another head of an HFC told on condition of anonymity that management and board of bank are not willing to take any risk in the current environment. He also added that the current scenario is expected to put relatively smaller NBFCs under a lot of pressure.

Also, mutual funds on the debt side, corporate debt market and big investors in the commercial paper have also become selective in putting money in this market. Therefore if NBFCs raise capital, they would have to pay higher interest payments, given the rates on two-month commercial papers of these firms that have gone up by about 200 basis points since September 6, said the source.

In order to ease the liquidity squeeze for HFCs and other institutions, National Housing Bank announced on Monday to the refinance limit for the period between July 2018-June 2019 by Rs 6,000 crore to Rs 30,000 crore from the earlier Rs 24,000 crore for eligible entities. NHB is the principal agency to promote HFCs and provides financial support to eligible institutions. So far, it has sanctioned Rs 8,835 crore of refinancing.

Meanwhile, stocks of few NBFCs took a hit on Monday after RBI’s Friday announcement that it is mulling to introduce tighter guidelines for such entities to avoid rollover risks. While Edelweiss Financial Services tumbled as much as 13.9%, Dewan Housing Finance Corporation stock dropped 12.3%, and JM Financial and IIFL Holdings Ltd plunged as much as 11.1% and 11%, respectively.

On September 28, the central bank announced the measure to infuse approximately Rs 2 lakh crore in the market to ease the liquidity crunch. In the next six months period – October 29 to March 13, 2019 – IL&FS group has to repay about Rs 1,085 crore worth of commercial papers. It has a total debt of about Rs 91,000 crore.

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