The disappearance of Coffee Day Enterprises founder V G Siddhartha could be bad news for the non-banking sector, already struggling with a liquidity squeeze. Charge documents from the registrar of companies (RoC) showed that a few non-banking financial companies (NBFCs) have exposure to the company, which might face repayment delays in the face of uncertainties.
Uncertainty prevailed in the equity markets on Tuesday as a massive search operation was mounted in Mangalore, where he was last seen Monday night. Reacting to the development, Nifty Bank Index fell 1.72% to close at 28,791.60 points on Tuesday on the NSE, while the Nifty PSU Bank index fell 4.9% to ₹2,709.
According to a financial sector analyst who did not wish to be named, the liquidity problem could be compounded by this development although the company’s debt is not very high.
“This total exposure is around ₹8,000 crore and we believe that ₹2,000 crore would have come to Siddhartha from the sale of his Mindtree shares to L&T, reducing the debt number," the analyst said. He added that ₹8,000 crore is not a very large number at a systemic level and it has been shared by several lenders.
He said that repayments could get delayed if loan contracts are re-negotiated following Siddhartha’s disappearance. This, he said, could happen because the promoter pledged against which the loans are secured will have to be relooked at.
Documents from RoC showed that apart from NBFCs like Aditya Birla Finance, ECL Finance, Shapoorji Pallonji Finance, banks like Axis Bank, Yes Bank and RBL Bank have exposures to Coffee Day Enterprises.
Meanwhile, Karnataka Bank said in a regulatory filing on Tuesday that it does not have any exposure to Coffee Day Enterprises. However, Coffee Day Global Ltd., one of the unlisted group companies, has been a customer of the bank since 1996 and has credit facilities with the present outstanding of ₹152.48 crore constituting 0.29% of total advances of the bank.
“The above facilities are fully secured by collaterals of properties besides primary securities. All the loan accounts are regular as on date," the bank said.
Another analyst said that non-banks had a lot of expectations from the Union Budget and because the government kept talking helping the sector. However, the Budget did not have much for the sector, he said. “The law of succession will apply and that person will have to be now liable for the repayments. Non-banks might have to take a haircut if there are repayment delays by the company," the second person said.
Non-banks have not been able to absorb the systemic shock caused by IL&FS defaults last year and the consequent shortage in funds available to them. In addition, most NBFCs have borrowed short-term money to fund long-term assets; they were able to continually refinance their borrowings as long as liquidity conditions were easy. As liquidity tightened, they were left facing debt repayment challenges and prospects of rating downgrades.