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Business News/ Opinion / Views/  Srei’s fall and the sorry saga of shadow lenders
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Srei’s fall and the sorry saga of shadow lenders

The financier could not survive its failure to come up with a credible debt recast plan. Let’s hope we’re reaching an end to our non-bank-lending crisis and risks will be kept in check

Photo: MintPremium
Photo: Mint

The saga of our non-bank financing sector is yet to fully unfold. After the 2018 implosion of IL&FS and 2019 collapse of DHFL, on Monday the Reserve Bank of India (RBI) added the Kolkata-based Srei Group to the country’s list of failed non-bank lenders. The regulator superseded the boards of two non-banking financial companies (NBFCs), Srei Infrastructure Finance Ltd and Srei Equipment Finance Ltd, citing “governance concerns and defaults". To manage them, RBI appointed an administrator, under whose charge it would like their insolvency to be resolved through India’s bankruptcy code, for which it has sought approval from the National Company Law Tribunal (NCLT). Srei declared itself “shocked" by RBI’s move, claiming that banks had control of their cash flows anyway and had recovered 3,000 crore in dues from an escrow account. The group said it had asked creditors for payment relief and proposed to repay them fully by means of a debt rejig. The NCLT, Srei argued, had ordered that no coercive steps be taken by either creditors or regulators. True, the tribunal had. But that was last December; this year, the appellate tribunal upheld an RBI appeal against that order and set it aside. This should have been hint enough of stern action to follow.

Srei had been cash-strapped for a prolonged period. Its lenders had been faltering on their obligations, rating agencies had downgraded their paper, and RBI had flagged concerns of possible related-party loans. The regulator’s intervention was probably driven by an assessment of Srei’s inability to get the required buy-in for its debt-recast proposal. Its talks with investors to pump in capital had not resulted in anything that could spell a rescue, and so a pre-emptive call must have had to be taken. As seen in earlier cases, a lender’s collapse could have a domino impact on the finances of others, which in turn can destabilize credit markets and cause shudders all around. Srei reportedly owes about 30,000 crore to banks alone and then there are bond-holders too. Their best hope at this juncture would be a swift resolution under our bankruptcy law. DHFL, which faced similar action, was eventually acquired by the Piramal Group. The same mechanism could yield a broadly acceptable outcome in this case, too.

At the core of our NBFC crisis has been a big mismatch in borrowing and lending tenures, with short-term funds wantonly deployed for longer-term loans, a problem compounded by mispriced asset-specific risks. As the effects of an economic slowdown after 2017-18 began to wind their way through our financial system, several loans were bound to go bad and expose vulnerabilities that had stayed hidden. The coming apart of infra-lender IL&FS set off counterparty havoc and Srei was among many other operators that suffered the resultant liquidity shock in this sector. The group was still wobbly when covid struck and project disruptions added to its woes. As its bankruptcy became increasingly inevitable, there was perhaps no better way to minimize knock-on distress than to push for its sale with some of its debt burden relieved. The hope now is that we are finally in the final stages of this sorry saga of shadow banks, but this would be a forlorn hope if no safety lessons are learnt from it for future operations. Now that RBI has NBFCs under watch to a greater extent than before, assets and liabilities should not be allowed to get so badly misaligned again. Nor, for that matter, should favours be extended in the guise of loans.

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Published: 05 Oct 2021, 09:14 PM IST
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