According to an article written by economist C.P. Chandrasekhar and published in the January 2020 issue of The Economic and Political Weekly, “As in September 2019, there were 9642 Non-Banking Financial Companies (NBFCs) out of which only 82% of India’s NBFCs were deposit taking institutions (NBFC – D) permitted to mobilise and hold deposits.” Among the rest of the non-deposit institutions, only 274 were identified as being systematically important by virtue of having an asset size of Rs 500 crore or more.
The crisis story of NBFCs came to surface when crisis engulfed the Infrastructure Leasing and Financial Services (IL& FS) and Dewan Housing Finance Limited (DHFL) companies, respectively. The fall of these two big companies affected balance sheets of many banks and mutual fund companies. Many NBFCs increased their lending and investment activities to a great extent. Most of them focused on infrastructure, retail lending and real estate. The industry accounted for 57 % of gross advances in September 2019. Out of this 37% was in infrastructure and 20% was in retail.
Crisis of the NBFCs
Chandrashekhar has pointed out two kinds of risks that led to the NBFC crisis. The first risk came from possible default on the part of the borrowers. They were not able to repay in time. The second risk originated from the reduction of the attractiveness of the debentures, bonds and commercial papers issued by the NBFCs. Investors found several other options of other financial institutions (mutual funds etc.) to park their savings. Therefore, the crisis that affected the NBFCs was a result of both the above-mentioned setbacks and was characterised by loans to areas like infrastructure, commercial estates and housing going bad. Along with this, the NPA problem in the banking sector curtailing their access to bank lending.
In this critical situation, some of the reputed NBFCs are trying to go forward and do meaningful business. One of them is SREI Infrastructure Finance Limited. Hemant Kanoria, Chairman, Srei Infrastructure Finance Limited has recently written a letter to Prime Minister Narendra Modi, suggesting him to take some immediate and effective steps. The main focus of the submission has been to infuse liquidity in the economy. He also suggested some steps that can be immediately taken to solve the liquidity crunch of the NBFCs.
Some of the important suggestions are: (i) moratorium on debt repayments for a year for corporate or individuals; (ii) relaxation of norms for existing loans like a two year window for borrowers and lenders to re-work the term of loans; (iii) to clear all outstanding payments to contractors and businesses due in government projects; (iv) quick settlement of outstanding tax refunds; and (v) due arbitration awards for several projects.
According to the estimates of Ajit Ranade, Chief Economist of the Birla Group of Industries, the government owes around Rs10 lakh crore to various private companies. Under the present circumstances, if the government releases this money that it owes to various private organisations, the economy may get a major boost.
To provide ample liquidity to the NBFCs, Hemant Kanoria suggested that the NBFCs be provided a seven-year term loan from banks up to three times their net worth and also suggested government development financial institutions like LICI to take ten-year redeemable or convertible preference shares issued by the NBFCs. He also suggested that the government should take partial credit guarantee. NBFCs are allowed to avail input tax credit to the extent of 50% but Hemant Kanoria has requested for allowing full GST credit.