How will the NBFC segment handle Rs.35,000 crore outflow?
Come September and the non-banking finance companies (NBFC) have fresh problems to worry about. Even last year the NBFC problems and the liquidity crunch had begun in September after the IL&FS defaults became public. So what exactly is the problem that NBFCs are going to face in the month of September and what are the options?
The Rs.35,000 crore challenge
Most NBFCs have historically had large loan repayments coming up in the month of September. That historically continued as it used to be rolled over each year and hence did not pose any fresh problems. However, there is close to Rs.35,000 crore worth of NBFC debt that is coming up for repayment in the month of September and this will have to be completed before the end of the month. The question is whether lenders will be willing to roll over the loans and at what cost. Normally, the tenure did not matter because these NBFCs could raise fresh loans from the market to repay the old loans and hence it was like a virtual rollover of loans. Things changed after the IL&FS crisis last year and the near fall of Dewan Housing in the current year. With combined debt of Rs.190,000 crore, these 2 companies pose a systemic problem and that has made lenders wary of NBFCs overall. Any roll over this time around will not happen easily or will happen at a largely unaffordable rate of interest. Both these options pose a major risk for NBFCs.
NBFCs – Repayment impact
Broadly, there are 4 categories of NBFCs that will have repayments coming up in September. Firstly, there are the likes of HDFC and LIC Housing with adequate access to institutional sources of funding and any rollover should not pose any major problems for these companies. Then there are the stronger private players like IIFL, Edelweiss that have maintained sufficient liquidity and kept leverage in check. They should also sail through. Thirdly, there are the NBFCs without maturity mismatch who will still have fairly liquid assets and the problem will be much smaller for them. Finally, the most vulnerable segment will be the NBFCs that have a maturity mismatch. The ones that borrowed short and lent long may have the real problem.
What is the way out?
The government has already announced an NBFC rescue package in its Union Budget and that must be extended to the fourth category of NBFCs. Of course, the FM is right in the sense that there must be a distinction between liquidity risk and solvency risk. At least, where the risk is purely of liquidity, the banks must step in with the required liquidity and the government must give comfort to the banks. When even a small bunch of NBFCs default on repayments, it can create a systemic crisis as their loan books get compromised. The cascade effect must be prevented!