DECADE AFTER the Lehman Brothers crash, which
triggered off a global financial contagion, central bank-
ers and governments around the world are well aware of
how quickly panic and tight liquidity can spread – and
threaten the entire economy.
The government and the Reserve Bank of India
(RBI) are working overtime to ensure that a similar
panic and liquidity crisis does not get out of hand – and
roil the economy that is already facing too many other
pressures. After 10 months of liquidity deficit for banks,
the RBI liquidity tap is back to surplus in the last two
months, but will it stay there for long?
The events leading up to the current liquidity cri-
sis in the Indian financial system started, ironically
enough, with an attempt by the Indian banking regula-
tor to clean up the system four years ago. In 2015, the
RBI initiated the asset quality review (AQR) of banks
to unearth the number of bad loans that were hidden in
their balance sheets. As skeletons in the loan cupboards
of many public sector banks – and a few private sector
banks – came tumbling out, the RBI realised that close
to a dozen banks did not have the wherewithal to con-
tinue lending without cooking books. It put them un-
der what it called the prompt corrective action (PCA)
watch – and forbade them from lending afresh unless
their capital adequacy was shored up. The government,
also determined to clean up the financial Augean Sta-
bles, passed the Insolvency and Bankruptcy Code (IBC)
to force lenders to take recalcitrant borrowers to bank-
ruptcy court instead of giving them even bigger loans
with which they paid back their earlier loans.
Meanwhile, as banks became supposedly more
prudent about their lending, an even bigger storm
was inadvertently triggered off. As banks focussed on
cleaning up their books and lending more cautiously to
troubled sectors and businesses such as real estate and
infrastructure, the non-banking financial companies
(NBFCs) and housing finance companies (HFCs) were
making hay and experiencing growth like never before.
They had stepped into the breach and started provid-
ing funds to not only troubled sectors but also small and
medium enterprises that found it difficult to get project
loans from banks. The problem was that the NBFCs
and HFCs – often called shadow banks because they
lend like banks but have fewer constraints of regula-
tion – were actually borrowing short-term money from
banks and mutual funds to lend for long-term projects.
It was the perfect storm brewing in the financial sector.
That storm hit with full force when Infrastructure
30 I BUSINESS TODAY I August 11 I 2019
A
LIQUIDITY
DEFICIT
The prolonged deficit shows
that banks were not getting
adequate liquidity from
the RBI window for their daily
mismatches
Leasing and Financial Services (IL&FS), which was
both a lender and executor of infrastructure projects,
got into trouble. In June last year, one of its subsidiaries
defaulted, setting off a chain reaction. Suddenly, NBFCs
that were happily raising short-term commercial papers
(CPs) from banks and mutual funds to roll over their
previous borrowings, found it difficult to access the
money. Neither could they liquidate their assets – loans
to projects that were long term and incomplete.
The credit squeeze in the financial sector is now rap-
idly spreading to the real sectors of the economy, and
threatening to take them all down.
DIRECT HIT
The real estate and construction sector is bearing the
brunt of the NBFC fund crunch. Credit to developers,
which is wholesale funding, is vanishing fast. Parth
Mehta, Managing Director of Mumbai-based Paradigm
Realty, explains the dilemma that developers are facing.
“The industry’s bank loan repayment (dates) are near-
ing or are here but the market (sale of properties) is not
catching up,” he says. Banks and NBFCs are staying
away from early and mid-stage real estate project fund-
ing (which are at land acquisition or initial build-up
Apr-18
49,600
Jun-18
14,000
Jul-18
-10,983
Source: RBI,
CARE Ratings
May-18
14,200
COVER STORY > LIQUIDITY
Liquidity Surplus (+)
Deficit (-); (in ` crore)
