Will Runaway Growth Return For NBFC's?

Recent Crisis Of IL&FS Has Shattered Investors Trust On NBFC’s and HFC’s Stocks. Is It Time For The Investors To Rejig Their Portfolios?

- Himali Patel

In the financial markets anything is possible. Big companies can go crashing overnight without any warning. One volatile phase can wipe out the entire wealth accumulated by an investor over the years. And, even leading credit rating companies in India, considered as a reliable source to measure the financial health of a company, can sometimes fail to detect the early signs of a booming crisis. If you are aware of the ongoing financial crisis at Infrastructure Leasing & Financial Services (IL&FS), you would know what we are talking about.

It all started with IL&FS defaulting on multiple payments in September 2018. IL&FS piled up too much debt by borrowing heavily through cheap short-term commercial papers (CP) for funding its long-term projects which led to asset-liability mismatch. This snowballed into full-fledged liquidity crisis in the entire non-banking finance company (NBFC) industry rolling into the higher valuations and asset-liability mismatches.

IL&FS group has a consolidated exposure of above 910 billion concentrated largely in four subsidiaries namely IL&FS Financial Services, IL&FS Transportation Networks, IL&FS Tamil Nadu Power and IL&FS Engineering and Construction Company. A default of 1.5 billion to SIDBI by IL&FS transportation brought the issue to the shore. This was followed by defaults by other subsidiaries. In two months, over 130 creditors were knocking IL&FS’s door with legal notices for recovery of their loans. The defaulted amount is nearly one per cent of the entire Indian banking industry’s loan book.