Photo: iStock
Photo: iStock

How NBFCs found themselves in the middle of a storm

Ripple effects from a company defaulting on its payment obligations and news of a sell-off in a housing finance company's shares have put pressure on non-banking financial company (NBFC) stocks. Mint analyses how the events unravelled and what's ahead for NBFCs.

What were the first signs of trouble?

It started when Infrastructure Leasing & Financial Services (IL&FS) defaulted on its payment obligations, followed by downgrades by credit agencies in the past two months. On 17 September, rating agency Icra downgraded IL&FS’s credit rating to default, after it failed to meet repayment obligations of 12,000 crore in short-term and long-term borrowings. It earlier defaulted on a 1,000 crore loan from the Small Industries Development Bank of India on 13 September. The next day, it failed to redeem commercial papers worth 105 crore. The Reserve Bank of India (RBI) ordered a special audit of the firm.

Why did the market panic?

The market panicked after news emerged that DSP Mutual Fund was selling DHFL’s one-year 300 crore paper at 11%. This raised the fear of a contagion effect. Kalpen Parekh, president of DSP Investment Managers Pvt Ltd, clarified it had no credit issue with DHFL and was just trying to bring down their portfolio maturity. The DHFL management was also quick to clarify that it had not defaulted on any bonds or repayment, nor had there been any instance of delay on repayment of any liability. The management of DHFL added that it did not have any exposure to the beleaguered company, IL&FS.

Was it a liquidity crunch or a solvency crunch?

It was a liquidity crunch, to which a sliding rupee contributed partly, as RBI tried to curb its decline by selling dollars and buying rupees, drying up liquidity in the market.

What are the government and RBI doing in this situation?

On Monday, finance minister Arun Jaitley tweeted that the centre would take all steps to ensure that adequate liquidity was provided to NBFCs, mutual funds and small and medium enterprises, after stock and bond markets were rattled on Friday. On Sunday, RBI and Sebi said they were monitoring recent developments in the markets and would take action if necessary. LIC chairman V.K. Sharma said all options, including increasing its stake in IL&FS, were open.

Which NBFCs do brokerages prefer?

Edelweiss Securities said it was cautious on NBFCs at this juncture and preferred private banks such as ICICI Bank and HDFC Bank. Edelweiss prefers players with strong balance sheets, prudent risk management practices, well-matched asset and liability mismatch and limited vulnerability to earnings such as HDFC or those with adequate pricing power such as Shriram Transport Finance Ltd and Dewan Housing Finance Ltd. Citigroup’s picks are HDFC Ltd and L&T Finance Holdings Ltd.

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