The liquidity shortage IL & FS could have serious consequences not only on the NBFCs, but also on the economy in general: Moody's

money, travel, travel plansTight liquidity situations, if prolonged for an extended period of time, can also be negative for the economy as a whole.

Moody's Investors Service raised concerns about the current liquidity situation in the capital markets, which was triggered by the failure of IL & FS last September. In a note published Monday, the rating agency said persistent liquidity stress over the long term will have a profound impact on non-bank Indian financial corporations (NBFCs) and will erode their credit profiles considerably.

He added that the current tightening of liquidity could also be negative for the economy as a whole. "The effects on NBFIs (non-bank financial institutions) will affect the entire economy – mainly through the credit channel – as NBFIs are a major provider of credit for the economy. The outstanding loans / GDP is recorded at the end of March 2018.% of banking system loans / GDP of 52%, "says the report.

IL & FS, which was once a world-class infrastructure, and its subsidiaries have recently defaulted on several short-term debt repayments. IL & FS's failures have resulted in a tightening of market liquidity and have prevented small lenders from doing normal business before the end of the year holidays, with public sector banks as well as private sector banks having stopped lending to NBFCs and real estate finance companies. . IL & FS currently has a debt of over 90,000 crores of rupees.

READ ALSO: IL & FS Debt Crisis: Finance Ministers and NBFCs work on ways to reduce liquidity shortage, but RBI standards may undermine their effectiveness

Srikanth Vadlamani, vice president and chief credit officer of the rating agency, said the authorities would take steps to limit the duration and extent of current liquidity problems, and that NBFCs could face several weeks of liquidity shortages. However, he also added that long-term liquidity stress could be negative for the entire economy as well as for the structured finance sector as a whole.

Given that these small lenders rely primarily on the markets to borrow to finance the growth of their assets, the continued tightening of liquidity would lead to an increase in NBFC financing costs, or even a "difficulty in recovering their liabilities," the report adds.

However, the credit quality of the structured finance sector in the country and the performance of asset-backed securities will not be significantly affected. For its part, another rating agency, Fitch, said last week that recent defaults by IL & FS have highlighted the risks of continuity for debt-backed securities issuers in India.

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