In India, non-bank financial corporations (NBFCs) are in a difficult phase after failures by a blue infrastructure lender, infrastructure leasing and financial services (IL & FS), securities short-term debt. The lack of liquidity in the sector has created tensions between the Reserve Bank of India and the government. It should be noted that the government is willing to mitigate the liquidity crisis in the country's financial markets by pushing the central bank to facilitate the flow of credit, while the RBI says the sector has access to enough money from the banks. usual routes.
NBFC sector crisis
IL & FS, a company in which many companies, as well as mutual funds and insurance companies, had invested using short-term instruments such as commercial paper and non-convertible debentures (NCDs), failed to meet its debt obligations since August. IL & FS's borrowings from banks and financial institutions amount to almost 63,000 crores of rupees according to the 2017-2018 balance sheet, according to the Ministry of General Affairs (MCA).
Some fear that their funds will be locked into IL & FS debt. About 2 trillion rupees ($ 27.23 billion) of NBFC and HFC debt are expected to be repaid by the end of December. In addition, NBFC financing costs are expected to increase and could lead to a sharp decline in their margins.
Read also: IL & FS case: the board of directors led by Uday Kotak warns against an exposure of Rs 53,000 crore bank
What was the source of funding for NBFCs?
NBFCs were the largest net borrowers of financial systems, with gross receivables of approximately 419,000 crores and gross debts (loans) of approximately 717,000 crores in March 2018. According to the gross debt burst, The largest amounts received by NBFCs were from banks (44%), followed by mutual funds (33%) and insurance companies (19%).
Is it because of the banks, the biggest lenders to NBFC?
Banks are the main source of resources for NBFCs. After failures of IL & FS, banks in the public and private sectors almost stopped lending money to NBFCs and Housing Finance Companies (HFCs), which heightened concerns about the approach of the end of the year holidays. The inadequacy of assets and liabilities in NBFC's activities, such as IL & FS, is a fundamental problem, which means that these companies are mobilizing capital in the markets for 3 to 5 years and lend for durations longer – 10 to 15 years. Now, failures in such a scenario will drive potential investors away from corporate debt, the Indian Express said.
On the other hand, when interest rates rose, NBFC bridging margins were strained and capital raising became difficult. According to the banks, they have started to reduce their exposure to NBFC since April 2018, following the huge bad loan, which resulted in a 4.6% drop in their exposure to the sector.
What did the RBI do to provide cash?
Last month, the RBI announced the injection of about 40,000 crores of rupees into the system in November through government bonds to cope with the demand for cash before the end of the year festivities. In October, the central bank had already injected 36,000 crores of rupees into open market operations. On the other hand, the sector and the government are trying to open a special liquidity window to meet the financing needs of the sector. However, the bank regulator was of the opinion that this type of move could be misused, as it would have to provide funds to all the companies that approach it for funding, claiming that the sector has sufficient liquidity. At the same time, the State Bank of India has also proposed to buy good quality assets worth 45,000 billion rupees at NBFC.
In the future, NBFC from here
The current liquidity situation for NBFCs could remain tense. In addition, borrowing costs could be higher, given the recent unfavorable sentiment in the bond market. On the other hand, the central bank could also tighten industry standards to bring these companies closer to commercial banks at the same level as commercial banks, The Indian Express reported.