NBFCs also is known as Non-Banking Financial Companies have a huge contribution to India’s economy and common men’s life. It is well known that this sector was facing some issues from the last months that have been confirmed by a top-ranking government official website. He marked that these NBFCs are facing an imminent crisis that is affecting this industry as well as people linked with it.
Injeti Srinivas-Corporate Affairs Secretary mentioned in his interview “There is a credit squeeze, over-leveraging, excessive concentration, massive mismatch between assets and liabilities, coupled with some misadventures by some very large entities, which is a perfect recipe for disaster” that shows how problematic the issue has become.
What are these crisis about?
NBFCs are facing a liquidity crunch which means they don’t have credits or money to lend to people and that’s why they are facing enormous difficulties in raising funds for people. They typically lend their funds from the commercial banks or raise money by selling their papers to mutual funds and further on-lend this money to retail customers, small and medium enterprises and so on. This is how the circle goes on.
When the NBFCs don’t have money to lend these retail customers and enterprises, it hits economic growth and this arrow falls downwards and causes many borrowers to default on loans.
What led to such NBFC crisis?
There are a couple of reasons behind this downfall or crisis. The most obvious one is the NBFC business model itself. Their business relied on short-term funds that turned out as long-term funds. This harmed the business with a condition of asset-liability mismatch. It can also be a reason that banks, mutual funds, and investors refused to give money to NBFCs. They feared that all will turn out into a long term contagious cycle where they won’t get as such benefits they are expecting to get. But the question arises is what are their fears real?
In the last few years, after the demonetization, excess of money was sloshing around the system. A lot of cash was deposited in the commercial banks and investors thought it to park their money in mutual funds. That’s why NBFCs were able to access cheap funds through debt schemes deployed by the fund managers. Their business showed tremendous growth and they were able to provide loans at double the pace of banks. But on the other side, mutual fund managers were in order to pursue high returns for their investors and so were the NBFCs and banks. This turned out to be a risk-taking condition in which they have to put pressure on their underwriting standards quality. Excess money was not only granted to NBFCs but also other companies such as infrastructure players. It was provided as a loan against shares which has now affected the market really bad.
Is NBFC Crisis- more than a solvency issue?
As explained above, NBFCs play an increasingly important role in the economy. They provided loans in the sectors where banks refused to go or did not ever want to go. Now that, these Non- Banking Financial Companies don’t have a source to raise funds or have to pay huge amounts of money to do so, has significantly choked the flow of credit to people harming the economy sector. In the future, if the conditions remain the same, it will surely hit the Micro, Small and Medium Enterprises (MSME) sector that is already suffering from harms of goods and service tax (GST) and demonetization.
Not only this, consumer demand in the economy has to suffer because of this crisis. Economic slowdown pressures due to the reduction in credit are already visible that shows how badly it is affecting the economic growth of India. This slowdown can further lead to non-performing assets in commercial real estate and infrastructure sectors.
Summary: NBFC crisis will surely harm the Indian economy due to which the middle-income group has to face losses due to the unavailability of funds and credits for their business. This condition needs a solution right now or various businesses and industries that are dependent upon NBFCs have to face great downfalls.