NBFC

LIQUIDITY
CRISIS

Troubles began in 2018 when

a major shadow lender IL&FS
unexpectedly default.
 WHAT CAUSED THE
CRISIS ?
IL&FS group defaulted in payment
obligations of bank loans and failed
to meet the commercial paper
redemption obligations.
Consequently, ICRA downgraded
the ratings of its short-term and
long-term borrowing programmers.
The defaults also jeopardized
hundreds of investors, banks, and
mutual funds associated with IL&FS.

The defaults sparked panic among

equity investors. A major reason
behind the troubles of IL&FS was
complications in land acquisition (The
2013 Land Acquisition Law). Cost
escalation also led to many
incomplete projects. Lack of timely
action worsened the problems.
Indian banking system grappling with
the NPAs trying to increase their
capital level acceptable to the RBI
norms. This made the banks unable to
finance large and long-term projects.
The NBFC tried to seize this opportunity
and started lending to big and long-term
projects such as loans to developers,
infrastructure financing, home loan, and
corporate financing. However, they took
short term borrowing in the form of the
mutual fund, commercial paper and lend
them for the long term. As the inflows got
dried, the repayment to the borrower
became difficult. The problem got worsen
when the big borrowers (such as DHFL and
Reliance) either delayed or defaulted in
their repayment. These are the primary
reason for the NBFC crisis in India.
 STEPS TAKEN BY THE
GOVERNMENT TO EASE THE CRISIS
IN THE SHORT TERM
The government measures to
provide partial credit guarantee
to public sector bank on their
asset purchases from NBFCs can
ease funding pressure only for the
short-term, says a report.

In the budget, the government

had said for purchase of high-
rated pooled assets of financially-
sound NBFCs, amounting to Rs 1
trillion during the current financial
year, it will provide a one-time six
months' partial credit guarantee
to public sector banks for their
first loss of up to 10 percent.
The funding stress has been most severe
for wholesale financiers, smaller NBFCs
and fintechs, which have struggled to get
even bank funds, while large NBFCs still
have good access to funding, albeit at a
rising cost, the report said.

The report however said NBFCs will

benefit more from the Rs 70,000 crore
recapitalisation of state-owned banks,
which will increase their capacity to lend
more.

Investor confidence in the NBFC sector

could also be boosted by a potential
asset-quality review of wholesale non-
banking lenders, leading to greater
transparency and more robust capital
requirements.