MillenniumPost
Opinion

Crunch in NBFCs

New government’s priority must be towards improving the situation of crisis-plagued NBFCs and directing RBI to save them from bankruptcy

The new Government that will be taking over at the centre after May 23 has to immediately jump into action to deal with the burgeoning

crisis among the non-banking financial companies (NBFCs) of the country which threatens to land the financial sector in a bigger mess. The Modi government earlier expressed its intention to initiate prompt action but the two-month long election campaigns disturbed the pace and now there is little time to lose.

In the next three months, about Rs 1 lakh crore of commercial papers raised by the NBFCs from investors will come up for redemption. These CPs are debt instruments issued by companies to raise funds for a time period of up to one year and these transactions are normal in the country's financial sector system. But the present situation is far from normal as many of the NBFCs have cash crunch due to the financial collapse of the Infrastructure Leasing & Financial Services (IL&FS) which reportedly financed projects to the tune of $25 billion (Rs 1.75 lakh crore) across the country and a large number of NBFCs are involved. Though the government stepped in and superseded the board, the situation still remains precarious continuing the cash crunch of the NBFCs.

As a result, there is widespread apprehension that the NBFCs on their own may default on the CPs. If that happens it will have a cyclical impact on the financial sector and the economy as a whole. The IL&FS crisis has hit the NBFCs in a big way. There is little scope of rollover of the loans as both the banks and the mutual fund companies have been extra cautious in advancing funds to the embattled NBFCs, affecting their operations and subsequently hitting margins.

In such a scenario, the Reserve Bank at its board meeting on Tuesday took the decision of not extending a credit line to the struggling NBFCs. The RBI felt there was no systemic liquidity issue, only solvency concerns in some large entities. Though the RBI is working on a liquidity framework for the NBFCs and the central bank has called the management of the big NBFCs to submit their plans for capital infusion and asset monetisation, the process may be time-consuming. The situation in the NBFC sector may further deteriorate in the interim period making it difficult for effective corrective action in the short term.

It will be in the best interests of the economy if the new finance minister convenes an emergency meeting after the new government formation to give a close look at the latest situation and ask the RBI to fast track its action programme to save the NBFCs from going bankrupt. The payment for the CPs is very crucial for the credibility of the sector and this has to be ensured so that any default does not take place.

As of now, the entire banking industry is in the grip of outstanding loans crisis. As on March 31, 2019, the commercial banks had loans outstanding to the tune of Rs 92.1 lakh crore. The outstanding loans for NBFCs stood at Rs 17.2 lakh crore during the same period. This was a fifth of commercial banks' outstanding loans. The NBFCs keep some of the essential sector running by giving regular short term loans between three and sixth month's duration by making use of the commercial paper. If the large NBFCs are not in a position to get their funds from normal channels, the user sectors like home loans, commercial vehicles as also private vehicles, will be affected. The economy, in general, is now facing some disturbing trends including the rising oil prices. In such a situation, the new government can ill afford to take the risk of a crisis accentuating in such a vital sector in the financial market.

AS far as the RBI is concerned, it is still not convinced that there is a liquidity crisis in the NBFC sector. The RBI is monitoring the liquidity position of the NBFC firms on a monthly basis and has asked the big NBFCs to appoint a Chief Risk Officer. The NBFCs need strict supervision by the central banker like the commercial banks but this time, the crisis is due mainly to the failure of the giant ILF&S and the government has to share the responsibility for that. That is why immediate action by the new

government is imperative now to avert further accentuation of crisis in the NBFC sector.

(The views expressed are strictly personal)

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