Treating Symptoms, Not The Disease

Though the Budget has provided immediate relief to the NBFC sector, it has failed to tighten the systemic noose around the factors that created this crisis.

- Manika Gupta

ONE OF THE MANY ISSUES THAT HAVE DOMINATED the Indian financial landscape is the credit crisis that painfully unfolded after IL&FS failed to service its debt obligations in the last quarter of 2018. The three-decade-old lending giant defaulted on a few payments and failed to service its commercial papers (CP) on the due date. A similar story unfolded at DHFL (Dewan Housing Finance), another shadow bank engaged in housing finance activities, followed by smaller names, thereby inviting a series of downgrades from the rating agencies. Although the market was rife with fears that IL&FS’s collapse would lead to a chain reaction across the NBFC space, but nothing of the sort has happened even after 10 months. It is increasingly being realised that there were company-specific reasons at play.

The IL&FS debacle has served to underline the high risks inherent in NBFC business models that rely on short-term market borrowings for long-term loans. The resulting risk aversion by lenders has landed NBFCs and Housing

Finance Corporations (HFCs) with high asset-liability mismatches in hot waters (for instance Reliance ADAG firms and DHFL). The NBFC sector plays a critical role in powering consumption and ensuring credit flow to unbanked segments and its troubles needed objective assessment and solutions.

The Budget was expected to go for structural reforms while addressing the fundamental ailments faced by some sectors, NBFCs being one of them. But it stopped short of that. Several steps have been announced but they are inadequate on some counts.

Proposals in the Budget