Tough times for NBFCs Context Non-Banking Financial Companies (NBFCs) have been finding raising funds more difficult due to the adverse situation created in the financial markets after IL&FS began defaulting on loans. Some basics related to financial operations of NBFCs NBFCs raise funds in two ways: 1) Short term borrowings via commercial papers 2) Long term borrowings via corporate bonds These funds are then given out as loans for financing various kinds of projects like real estate, infrastructure projects, etc What are the IL&FS issue and its effects on NBFCs? IL&FS is one of the biggest NBFCs. It took a lot of short term borrowings and gave out a lot of long terms loans. This created an ‘Asset liability mismatch’ for IL&FS as the return from long term loans takes 10-20 years, whereas the short term borrowings need to be repaid much much earlier. Accordingly, IL&FS started defaulting on repayment of bank loans, commercial papers and inter-corporate deposits. This affected all the financial entities associated with IL&FS. The rating agencies downgraded the ratings of its short term and long term borrowings programmes. The problem accentuated further because short term interest rates on commercial papers increased sharply leading to an increase in the cost of borrowing. All this has affected a large number of NBFCs :

  • Borrowing cost of NBFCs has increased
  • Accordingly, the amount of loans given has decreased
  • A large number of funds of NBFCs associated with IL&FS have got frozen
This crisis has even been called as India’s “Lehman moment” as it can have a contagion impact on the entire Indian Economy due to the exposure of IL&FS to various banks and financial institutions. What has been done so far to tide over the crisis?
  • IL&FS is listed as “systemically important” by the RBI. With over ₹1,15,000 crore of assets and ₹91,000 crore of debt, it is too big to fail. The interlinkages between IL&FS and other financial sector entities such as banks, mutual funds, and infrastructure players are too strong and the company would have taken them all down with it if it were allowed to fail.
  • Accordingly, the Government intervened by moving the National Company Law Tribunal (NCLT) to supersede the IL&FS board and change the company management.
  • In light of pressure on channels of commercial papers and bond issuances, RBI allowed banks to lend more to the NBFCs in October’2018. Accordingly, NBFCs resorted to more bank borrowings.
  • Although the interest rates still remain high and the crisis is far from over, signs of recovery have begun to show.
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