The Crisis In The NBFC Sector Is Adding To The Slowdown In The Economy

The crisis in the NBFC sector is crippling consumer finance and adding to the slowdown in the economy

- Nachiket Kelkar

Dewan Housing Finance Ltd, India’s third-largest pure-play mortgage lender, made a net profit of 874 crore in the first half of 2018-19. In the second half, however, the picture completely turned, and DHFL reported a net loss of 1,036 crore in the year ended in March 2019. The company has defaulted on its interest payments and credit rating agencies downgraded its debt instruments to ‘D’, which is junk status. Several other NBFCs were also downgraded by rating agencies.

At the heart of DHFL’s troubles is a liquidity crisis that is threatening to shake up India’s non-banking financial services sector. Many non-banking financial companies (NBFCs) relied on raising short-term funds by issuing commercial papers to provide long-term loans. When the commercial papers matured, they would simply raise fresh short-term debt. Thus the cycle continued, but then the IL&FS crisis happened.

IL&FS, which funded large infrastructure projects, had a debt of 90,000 crore, and the company defaulted on repayment in August last year. Investors lost appetite, and liquidity in a large part of the sector dried up. The financial stability report of the Reserve Bank estimates that non-bank share in credit declined to 26.6 percent of the aggregate domestic sources in 2018-19, from 39.1 percent in 2017-18.