The cri­sis in In­dia’s shadow bank­ing sec­tor will no doubt hang heavy over the up­com­ing RBI board meet­ing. Is a bailout pos­si­ble?

India Today - - INSIDE - Il­lus­tra­tion by NILANJAN DAS By Sh­weta Punj & M.G. Arun

The NBFC cri­sis will hang heavy over the up­com­ing RBI board meet­ing. Is a so­lu­tion in sight?

WHAT SEEMED TO BE A DEBT DE­FAULT by a sin­gle large non­bank­ing fi­nan­cial com­pany (NBFC)— In­fra­struc­ture Leas­ing and Fi­nan­cial Ser­vices (IL&FS)—has as­sumed such large pro­por­tions that it threat­ens to de­rail the en­tire sec­tor and throw into jeop­ardy a clutch of com­pa­nies in­volved in as­set fi­nanc­ing and per­sonal loans. The cri­sis in In­dia’s NBFCs, trig­gered by the IL&FS de­ba­cle, has taken cen­trestage in the eco­nomic de­bate even as the tus­sle be­tween the Union govern­ment and the Re­serve Bank of In­dia (RBI) on a host of is­sues, in­clud­ing re­fi­nanc­ing for NBFCs, is head­ing for a cli­mac­tic show­down at the cen­tral bank’s next board meet­ing sched­uled on No­vem­ber 19.

The threat looms large, but sources in­di­cate that the panic but­tons haven’t been pressed yet on In­dia’s thriv­ing EMI econ­omy—which funds ev­ery­thing from cars to homes to gold pur­chases in man­age­able equated monthly in­stal­ments, and even small busi­nesses—and there’s op­ti­mism that the RBI will come up with new ways to pump more money into NBFCs. “NBFCs are cur­rently not only in a cri­sis of liq­uid­ity but also of con­fi­dence,” says Abizer Di­wanji, part­ner (fi­nan­cial ser­vices) at con­sult­ing firm EY In­dia.

Un­til just about a decade ago, In­di­ans thought of EMIs for homes and ve­hi­cles, but in the past five years, more and more have be­come cheer­ful par­tic­i­pants in a deep­en­ing re­tail econ­omy to buy jewellery, smart­phones, lux­ury hand­bags, air tick­ets, fur­ni­ture, etc.—and a lot of that boom has been funded by NBFCs big and small. You want it, you buy it. If the price looks steep for a straight pur­chase, an NBFC will fi­nance it for you. You just pay an EMI— of­ten in­ter­est-free. NBFCs aren’t as strict about cred­it­wor­thi­ness and doc­u­men­ta­tion be­fore fi­nanc­ing you. They aren’t as strin­gent as banks. They lend to seg­ments that wouldn’t make the cut for a bank­ing in­sti­tu­tion, they take on more risk and of­ten lend with­out due dili­gence checks on the bor­rower. But they fund small busi­nesses, which fuel the econ­omy—from small trans­porters to traders or con­trac­tors.

There are over 11,000 NBFCs reg­is­tered



with the RBI across the coun­try, which have revved up In­dia’s con­sumer econ­omy as re­tail­ers across sec­tors have latched onto the EMI band­wagon to lure the con­sumer. Af­ter IL&FS de­faulted on pay­ments to lenders and trig­gered panic in the mar­kets, there is now spec­u­la­tion that the en­tire sec­tor might cave in un­less des­per­ate mea­sures are taken to keep it afloat. Sev­eral ques­tions have been raised on the vi­a­bil­ity of this shadow bank­ing sec­tor, which has grown at around 20 per cent and now has a fat ag­gre­gate book of Rs 26 lakh crore.

The RBI has since tight­ened reg­u­la­tions and now, de­pend­ing on who you speak with, you are warned or com­forted about the state of NBFCs. These in­sti­tu­tions work on short-term credit and nearly Rs 1.5 lakh crore is up for redemp­tion this month. There is a clam­our for the RBI to bail out the NBFCs. As Nilesh Shah, manag­ing di­rec­tor of Ko­tak Mahin­dra As­set Man­age­ment Com­pany, says, “If a child jumps off the first floor, will you help the child heal first or slap him? Now is the time to ban­dage the child, then you can rap him.”

How the cri­sis un­folded

Like ev­ery other busi­ness, NBFCs have short-term and long-term cash re­quire­ments. They take long-term loans from banks as well as in­sti­tu­tions by rais­ing deben­tures. These loans ma­ture, and ad­di­tional loan dis­burse­ments need to take place. “NBFCs’ as­set li­a­bil­ity man­age­ment is tougher than of banks,” says Di­wanji. “They don’t nec­es­sar­ily match cash flows and there are al­ways gaps. They don’t have fixed pe­riod re­ceiv­ables and fixed pe­riod payables, un­like banks who have sav­ings ac­counts, which is float­ing cash.” As part of their reg­u­lar busi­ness, these NBFCs keep bor­row­ing short­term money through com­mer­cial pa­pers (CPs) of three or six months from mu­tual funds. With the IL&FS de­fault, some mu­tual funds were left cash-strapped. “With the stock mar­ket go­ing down, there have been more with­drawals from mu­tual funds. They have been try­ing to cur­tail more and more cash, and hence not giv­ing out CPs,” adds Di­wanji. This choked NBFCs of funds, and their dis­burse­ments slowed down. Growth suf­fered and ow­ing to liq­uid­ity fears, the stock prices of these firms took a hit. Com­pa­nies then be­gan to sell sub­sidiaries to raise cash.

Shah says the bank­ing sys­tem needs Rs 90,000 crore more to main­tain its liq­uid­ity. And some NBFCs could be in trou­ble be­cause of an as­set-li­a­bil­ity mis­match, where short-term fund­ing is used to fi­nance long-term as­sets. “It will be stupid to as­sume that the en­tire Rs 28 lakh crore will be im­pacted,” says a Mum­bai-based an­a­lyst. While the govern­ment pre­sented a grim­mer pic­ture, an RBI source clar­i­fied that “sys­tem wise, there is ex­cess liq­uid­ity”.

A Crisil anal­y­sis of the liq­uid­ity po­si­tion of the large non-banks—NBFCs and hous­ing fi­nance com­pa­nies—it rates shows that they are “main­tain­ing ad­e­quate liq­uid­ity buf­fer to man­age mis­matches, if any, in their as­setli­a­bil­ity ma­tu­rity pro­files”. Says Kr­ish­nan Si­tara­man, se­nior di­rec­tor, Crisil Rat­ings: “In an en­vi­ron­ment where ac­cess to fund­ing has be­come a func­tion of mar­ket con­fi­dence, the quan­tum and qual­ity of such liq­uid­ity cush­ion will be the key dif­fer­en­tia­tor. The busi­ness


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