Default on payments has put NBFCs under scrutiny and exposed the fault lines in the commercial papers they have issued.
Multiple loan defaults by IL&FS and the subsequent panic around commercial papers (CPs) has put the spotlight on non-banking financial companies (NBFCs), India’s shadow banking space. To gain market share, NBFCs increasingly issued CPs – a short-term debt instrument – to finance long-term projects at a time when credit growth in banks slowed. The overall value of outstanding CPs (the interest bearing balance of a loan) was 6.4 lakh crore as of July-end; 96 per cent growth since July last year. Mutual funds and banks bought such CPs owing to NBFCs having shown better loan growth and stronger net interest margins than banks. But the golden phase did not last long.
IL&FS defaulting on debt payments and fund house DSP selling DHFL paper at a steep discount had a domino effect across NBFC yields, whose stock prices also crashed. While some say that the liquidity crisis has been blown out of proportion, the government and the Reserve Bank of India (RBI) have gone into damage control mode.
A consequence of these events is that NBFCs are likely to now face higher cost of borrowing, which means growth predictions will have to be recalibrated and net interest margins (NIMs) would shrink.
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