IL&FS De­faults Hit Com­mer­cial Pa­per Mar­ket, Oct Sales Dip 65%

Liq­uid­ity squeeze and a lack of con­fi­dence in fin cos’ short-term pa­pers spark cri­sis

The Economic Times - - Front Page - Saikat.Das@ times­

Mum­bai: The liq­uid­ity squeeze that has gripped non-bank­ing fi­nance com­pa­nies (NBFC) has dealt a blow to In­dia’s short-term debt in­dus­try. Com­mer­cial pa­per (CP) sales by fi­nan­cial firms, which often bor­row from the mar­kets for on­ward lend­ing to both com­pa­nies and in­di­vid­u­als, have plunged to about a third of what they used to be.

Fi­nan­cial com­pa­nies sold .₹ 54,113 crore of com­mer­cial pa­pers in Oc­to­ber, which was 65% down com­pared with .₹ 1,53,165 crore of av­er­age monthly sales in July and Au­gust, showed data com­piled by Edel­weiss. CPs are short-term debt in­stru­ments, usu­ally with one, two, or three­month ma­tu­ri­ties.

“A cri­sis of con­fi­dence has pre­vented in­vestors from tak­ing new bets on CPs is­sued by fi­nance com­pa­nies,” said Ajay Man­glu­nia, ex- ec­u­tive vice-pres­i­dent at Edel­weiss Fi­nance. “The CP mar­ket was grow­ing in the past two years as it is a cred­i­ble source of short­term fund­ing. (But) the worst may be be­hind us now, with fi­nan­cial ser­vices com­pa­nies buy­ing back or re­pay­ing their li­a­bil­i­ties.”

The cri­sis was sparked in Septem­ber when IL&FS de­faulted on pay­ments. This is among the is­sues that fea­ture in the row be­tween the cen­tral bank and the gov­ern­ment, with the lat­ter seek­ing eas­ier liq­uid­ity for NBFCs.

Mean­while, in­ter­est rates have surged about 200 ba­sis points over the two-month pe­riod, with AA+ or AA-rated com­pa­nies ex­pe­ri­enc­ing the steep­est in­creases in bor­row­ing costs. At the peak of the cri­sis in late Septem­ber, De­wan Hous­ing Fi­nance’s (DHFL’s) deben­tures worth .₹ 300 crore were ap­par­ently sold by a mu­tual fund at yields touch­ing 11%, sig­nif­i­cantly higher than the rates at which NBFCs used to bor­row money three months ago. To be sure, DHFL and In­di­a­b­ulls Hous­ing Fi­nance have col­lec­tively bought back CPs worth about .₹ 7,000-7,500 crore since Septem­ber 21.

Among the Sen­sex stocks which led the gains were auto stocks such as M&M, Tata Mo­tors, Hero Mo­tocorp, Ba­jaj Auto along with In­fosys and Vedanta which gained be­tween 1% and 2%. The BSE mid­cap and small­cap in­dices gained 0.80% and 1.19%, re­spec­tively.

Among sec­tors, the BSE Au­to­mo­bile in­dex ral­lied 1.08% while in­dices com­pris­ing banks, con­sump­tion, IT and met­als ral­lied nearly a per cent. Samvat 2074 was the most volatile year with Sen­sex ral­ly­ing over 20% be­tween Oc­to­ber 2017 and Au­gust 2018 be­fore fall­ing 15% in the next two months. “Mid-term mar­ket out­look de­pends on a lit­tle bit of luck in terms of oil prices and lit­tle bit of sen­si­bil­ity for a sta­ble pro-econ­omy gov­ern- ment at the Cen­tre in the forth­com­ing gen­eral elec­tions in May next year,” said Nilesh Shah, CEO, Ko­tak Mu­tual Fund.

“Val­u­a­tions are cur­rently rea­son­able com­pared to last year samvat and, hence, one can ex­pect a de­cent re­turn.” Though the Sen­sex gained 8.3% in Samvat 2074, the BSE Mid­cap and BSE Small­cap in­dex lost 8% and15%, re­spec­tively.

The year also recorded one of the sharpest out­flows by for­eign funds, which sold nearly .₹ 23,000 crore in Samvat 2074. How­ever, do­mes­tic mu­tual funds pumped in nearly .₹ 1.33 lakh crore dur­ing this pe­riod. “I think the mar­ket will do well in com­ing year be­cause of hav­ing al­ready seen the bad things be­ing played out,” said Samir Arora, founder & fund man­ager, He­lios Cap­i­tal.

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