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A lot at stake in NBFC mess; even you and I have skin in it


By DK Aggarwal

Non-banking financial companies (NBFCs) have played a critical role in stimulating growth in f the Indian economy and their share in outstanding credit rose to 12.6 per cent at the end of FY18 from 10.8 per cent two years ago.

Recently, the sector was spooked after DSP Mutual Fund (MF) sold DHFL’s commercial paper at a yield higher than what the paper was trading at, and this raised liquidity concerns. The sector witnessed heavy selling pressure after the news spread that some NBFCs are having mismatch between their borrowings from the short-term money market and their lending.

As a part of total borrowing, NBFCs tapped short-term debt markets through debentures and commercial papers and lent to several infrastructure, power, road projects, which have long life spans.

Allaying fears of a liquidity crisis for these companies, the government along with the Reserve bank of India and SBI came forward to the rescue. RBI and Sebi are monitoring these developments closely.

Coming to the rescue of the cash-strapped NBFCs, State Bank of India has decided to buy their assets to the tune of Rs 45,000 crore and also assured liquidity support to the sector. Initially, SBI had planned to purchase assets worth Rs 15,000 crore through portfolio purchase this year.

Also, RBI has decided to conduct purchase of government securities under open market operations (OMOs) for an aggregate amount of Rs 36,000 crore in October (i.e. in the second, third and fourth week of the month). Also, Sebi has sought recommendations to strengthen the rules in a bid to enhance the overall governance standards for issuers, intermediaries and infrastructure providers in the financial market.

In order to avoid rollover risks, RBI is looking to strengthen short-term capital norms for NBFCs. It has also advised these firms to reduce their dependence on short-term funding, and instead make use of long-term funding routes.

The suggestion came as these infrastructure financiers’ huge dependence on short-term funding for long-gestation projects was seen as the root cause of the current crisis.

The current strain, if not contained, may cripple the sector and, at the same time, hurt fund flows to the economy. Debt markets are facing liquidity concerns, and the number of commercial paper issuances has already fallen significantly. The mutual fund industry is exposed significantly to the prevailing volatility in both equity and debt markets.

If data is to be believed, 42 per cent of the incremental lending in the system came from NBFCs last year. In turn, the NBFCs raised 25 to 30 per cent of their incremental funding through commercial papers. And mutual funds hold an estimated 60 per cent of the total outstanding NBFC commercial papers.

As NBFCs play a critical role in meeting different credit needs of the informal sectors, how the authorities contain this crisis and bring more transparency to the sector will determine how fast stability can return to the financial markets, and thus some of the the key sectors of the economy.

(DK Aggarwal is the Chairman and MD, SMC Investments and Advisors. Views are his own)

Source: Economic Times