Stocks of non-banking finance companies (NBFCs) have been in a free fall, rattling investors over the past few days. What began as a singular event, with one of the big names – IL&FS failing to repay its commercial paper dues – has blown into a possible liquidity crisis for the entire NBFC universe. Is the sharp fall in NBFC stocks justified?
Why the fear?
Why the fear?
In practice, banks and NBFCs can run into liquidity issues, mainly because of asset-liability mismatches. That is, their loans and borrowings do not come up for payment at the same time. Mismatches in the up to six months to one-year bucket often provide early warning signals of impending liquidity problems.
The financial services industry, especially NBFCs, is an important segment for private equity investments.
In the first half of 2017, private equity and venture capital firms had invested about $3.2 billion across 53 deals, while the corresponding period of 2018 saw investments of $4.1 billion across 74 deals, despite the rising non-performing assets and financial frauds in the banking sector, according to a report by EY and Indian Private Equity and Venture Capital Association.
Investors are likely to wait and see how the sector goes through this transition period.
According to the EY report, with a significant section of the Indian population still not having been penetrated by financial services, there is a huge growth potential for the financial services industry as the economy continues to grow at a healthy rate of close to 7%.
“The financial services sector is the fuel to any economy’s growth and should generally grow at 3-4 times its gross domestic product growth rate,” the report said.
However it would br worthwhile to watch - how this crisis is tackled by all the stakeholders - the NBFCs, the banks, the regulator - RBI and the government. It is important to manage sentiments and arrest the spread of panic and so far its been managed well.
However as the credit crunch tightens one would need to keep a close watch on the defaults - in the sectors which have been heavily funded by the NBFCs such as real estate. Large defaults will trigger a cascading effect as it will put pressure on the NBFC which has lent monies to the real estate company/ies which have defaulted. This NBFC will have obligations as it borrowed money from a bank to further lend these monies.
(Source: Wikipedia, livemint.com and thehindubusinessline.com )
