Indian NBFC Sector crisis declared by Corporate Affairs Secretary – Detailed Report.

By Abhay Harish Shah , Realty Quarter

Injeti Srinivas who is the corporate affairs secretary has said that there is an imminent crisis in the NBFC sector. The Non-Banking Financial Companies (NBFC) has been facing a difficult time from several months is known by everyone.

A top-ranking government official has proclaimed that the sector is facing an imminent crisis. There is a credit crash, over-leveraging, unreasonable focus, huge jumble among assets and liabilities, combined with certain misfortunes by some extensive elements, which is an ideal reason for the disaster, Corporate Affairs Secretary Injeti Srinivas told the Press Trust of India in an interview.

In recent months, the nation’s money related framework has been thinking about different hardships in the wake of the strife at expanded IL&FS Group, as well as debt defaults by some other large entities.

NBFCs face a crunch of liquidity. In other words, they have no money to lend or are facing huge difficulties in raising funds. Typically, NBFCs borrow money from banks or sell business papers to collect money from mutual funds. They lend this money to SMEs, retail customers, and so on. If NBFCs do not have money to lend, the credit flow to the economy will be reduced and will hit economic growth which may cause many borrowers to default on loans.

Srinivas stated that corporate governance was being tested in India. He added, however, that the risk was well managed by ‘ responsible ‘ firms and did not face such a dire situation. The way things are moving, it’s going to be for the good in the medium to long term. There may be turbulence in the short term, he said.

“You handle the risks if you are responsible. In the country, there are many firms with strong corporate governance. They take chances, but they also handle them. So, they don’t face such a terrible situation that most others face today,” said Srinivas.

Further, In the midst of situations where non-performing assets (NPAs) are connected to external factors, Srinivas observed that this wouldn’t be a satisfactory explanation. Earlier this month, former Prime Minister Manmohan Singh had said that the banking system was under immense stress and the way out of the disaster was to overturn several shocking inaccuracies, work more closely with the RBI, reactivate the credit delivery process and make sure adequate liquidity and cash circulation.

How did this take place?

A few things have to be taken into account. First, the company model of the NBFC is defective, first of all. It relied on short-term funds to be leveraged as long-term loans. This results in a situation known as an asset-liability error. For example, an NBFC raises funds through the sale of 6-month debt documents and loans them as a5-year car loan. This leads to the NBFC rolling over (or renewing) the six-month debt paper or raising new credit for paying the debt. In good times, this happens as a matter of course. However, this cycle is broken if times are tough.

This brings us to the second factor. Some IL&FS companies defaulted by which the cycle got broken. It was afraid that this would prove a contagion. Such entities would simply not default more banks, mutual funds and their investors. Many institutions refused to give NBFCs money as this fear arose. Funding costs for NBFCs increased by up to 150 basis points.