2019-08-11_Business_Today

FALL IN

DEPOSIT

GROWTH

Despite increasing

formalisation of

the economy,

deposits are not

growing as before

Source: RBI

Mar-12

13.46%

Mar-13

15.10%

Mar-14

14.09%

Mar-15

10.06%

Mar-16

7.00%

Mar-17

10.50%

Mar-18

6.10%

Mar-19

6.50%

ally emerged as the biggest players in the
LAP market with 53 per cent market share
and outstanding lending at `1.85 lakh crore
as of March 2019. However, the liquidity
squeeze has closed the doors to this source
too for SMEs.

CRISIS OF CONFIDENCE
A series of events snowballed into the cur-
rent cash crunch. The sudden discovery that
IL&FS – which had been classified by the
RBI as a systematically important financial
institution – was in a sorry mess and might
not be able to pay up almost `90,000 crore
of loans it had taken, was what triggered the
events that led to strict scrutiny and the re-
sultant liquidity tightening in the NBFC sec-
tor. That, in turn, set off a domino effect.
Dewan Housing, a large HFC, is on the
verge of a collapse because it had aggressive-
ly borrowed to lend and grow, but suddenly
found the money sources turned off. It de-
faulted on one loan, and then another, and is
now in discussions with its lenders to stave
off a collapse.
Other players like Anil Ambani-led
ADAG Group companies Reliance Home
Finance and Reliance Commercial Finance,
Indiabulls Housing Finance (post-merger
announcement), Edelweiss Financial Ser-
vices and Piramal Capital have either seen a
downgrade in their long-term or short-term
ratings or have been put under rating watch
for a possible downgrade later. Even some of
the biggest names are trying to sell off por-
tions of their loan portfolios or other assets,
or bring in strategic investors.
There are dozens of mid-size NBFCs
that have been facing severe resource con-
straints. Rating agencies have also turned
cautious: they are downgrading and putting
many companies under a rating watch.
The genesis of the current crisis is some-
what similar to the 2008 US credit crisis – a
phase of indiscriminate lending and higher
reliance on short-term debt followed by de-
faults by institutions, financial panic and a
crisis of confidence in the credit market.

TIGHT SQUEEZE
How big is the Indian credit squeeze?
Big. Here’s how. Banks – with 80 lakh crore lending book – turned cautious a few years ago. The29 lakh crore NBFC sec-
tor stepped in to give retail loans and fund
real estate, construction, MSMEs players,
and others. But post the IL&FS crisis, the
NBFC book is shrinking. Their share in

credit flow has shrunk from close to 40 per

cent last year to 26 per cent in 2018/19. The

new bankruptcy code, too, has had a role to

play – close to 2,000 defaulters are facing

National Company Law Tribunal (NCLT)

proceedings.

There was a chain reaction, from finan-

cial creditors to operational creditors, from

dealers or even customers. In addition, the

money flow from large investors like mutual

funds, insurers, HNIs or those who borrow

from NBFCs to invest in the real estate and

the secondary stock market is down to a

trickle. As a result, many mid-size compa-

nies are not getting the right valuations in

the primary market. For instance, resource

mobilisation by way of public and rights is-

sues fell drastically from `83,000 crore in

2017/18 to `16,000 crore in 2018/19. “Good

companies will turn bad because of liquidity

shortages,” warns Hiranandani.

Are Indian policy makers proactive

enough to douse the fire? A fortnight ago,

the Union Budget proposed that PSBs buy

asset portfolios of financially sound NBFCs

with `1 lakh crore guarantee coverage of first

loss up to 10 per cent. The government has

also allowed foreign investors to invest in

debt securities of NBFCs.

Will any NBFC be bailed out? “The

question is how it (the gap) is to be bridged

to restart the lending,” says Jaspal Bindra,

Executive Chairman at Centrum Group, a

diversified financial services firm.

THE CLOGGED NBFC TAP

At the centre of the crisis are NBFCs, which

have been one of the largest sources of funds

for corporate India as they pool in resources

from mutual funds and insurers. When

banks’ balance sheets were being cleaned,

NBFCs supported the key industries. In fact,

banks chipped in with lending to NBFCs

(currently, the level is in the region of `6 lakh

crore). “This situation completely changed

after the IL&FS crisis,” says Hiranandani.

Banks withdrew credit as did the mutual

funds (which were lending through short-

term CPs). This shortage created asset-lia-

bility mismatches.

The CP issuance data for the past five

years shows the dangerously high depen-

dence on short-term funds by NBFCs. CP

issuance jumped to `25.96 lakh crore from

`11.50 lakh crore five years ago (see: Raising

Resources From Market). NBFCs were not

bothered about redemption because supply

was much more than the demand. “They