NBFC Crises: How The Central Government Is Lending A Helping Hand

If you are a regular follower of financial news, it is quite likely that you would have come across the term ‘NBFC crisis’ in the recent past, with regard to policy decisions affecting the NBFCs as well as their stock prices taking a toll due to the same. With the government having decided to help the NBFCs come out of their crises through various reforms in this year’s union budget, it appears to be a positive way forward for the NBFC struggling with the crises of liquidity crunch.

Before we speak about the importance of NBFCs in India’s economy and how government measures can help them, let us first understand what the NBFC Crises means.

What is the NBFC crisis?

The Non-Banking Financial Companies (NBFC) of India are a sector who help the economy by providing short term loans to people, provide private educational funding, insurance, retirement planning etc. These companies faced problems when they started running out of liquid funds to lend out to people. An NBFC mainly raises funds by borrowing from banks and sell commercial papers to mutual funds to raise money. Now when they are facing difficulty in this, they are unable to lend out money to the borrowers this hampering the economy.

Reason for the NBFC crisis?

The crisis to begin with occurred because the NBFC were raising funds on short term, but lending the same out for long term, due to which borrowers were defaulting loans, thus leading to cash crunch for the NBFCs. As a result of this, NBFCs started seeking extension to repay their loans. While it worked for a couple of times, the fear that it would become a routine practice made banks refuse lending money to NBFCs. This led to furtherance in the problems faced by NBFCs in raising money, as the sentiment spread across the market.

What has government done to help NBFCs?

In her maiden budget, Finance Minister Nirmala Sitaraman has acknowledged the important role played by NBFCs especially for providing funding to SME sector. The government to help NBFCs revive, has announced one-time six-month partial guarantee of Rs. One lakh crore to state run banks for purchasing the consolidated pooled assets of NBFCs which are financially sound. Meaning, government will take one time guarantee of the loans taken by NBFCs from state run banks up to Rs. One lakh crore, only for financially sound NBFCs. The government has also proposed foreign institutional and foreign portfolio investment in NBFCs, which will help them raise money from foreign bodies. However, the move also has regulatory provisions through which NBFCs will now be regulated by the RBI.

What impact has it made on stock market?

Companies in the NBFC sector such as Ibullshousing finance, DHFL, L&TFin were most affected by the crisis leading to a drop in their share prices. The condition was most tragic in case of housing finance company DHFL, when fund house DSP offloaded Rs 200-300 crore worth of commercial papers of DHFL at higher yields, it sparked off fears. After this news, DHFL fell 47% in one day, and continued to be in pain. As a result, it has stopped taking new deposits and blocked premature withdrawals after a credit rating downgrade.

With this case, market was facing dilemma, because future of NBFC was questioned. But HDFC, SRT finance, LIC housing finance were among better NBFC’s that funds as well as retail customer trusted on.

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