Taming Shadow Banks

NBFCs are facing asset-liability mismatches and undergoing a balance sheet adjustment. But they need more regulatory intervention, too.

- Rashmi Pratap

JUST ABOUT A year ago, the nonbanking financial sector (NBFC) was on a tear. It was also the darling of stock markets. NBFCs were growing rapidly – in many cases faster than banks – and their chiefs were feted like star bankers. A year later, things couldn’t be more different. As the IL&FS scandal brought things to a head, banks, mutual funds and others who had been happily subscribing to NBFC commercial paper and other debt realised there was something rotten in the sector. Since then, the troubles have been multiplying.

Some of the biggest names in the NBFC universe, including Dewan Housing Finance Ltd. and Reliance Capital, have seen their reputations getting hit after debt defaults. The reason is simple. NBFCs depend on short-term funding sources such as commercial paper to raise funds that they then lend for longer term projects. The trick is to keep rolling over these debt papers, which has become difficult after the IL&FS crisis due to liquidity squeeze and perception of higher risk. Those who are holding on have been forced to bring out press releases to show they are not in trouble. Indiabulls Housing Finance, for example, has given out its cash and cash equivalent position to reassure investors and others that it is capable of meeting its commitments. The NBFC defaults have also badly hit debt funds. What was sold to risk-averse investors as a rock safe investment is turning out to be anything but that.