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Between the devil and the deep blue sea

After a stupendous run over the past five years, NBFCs face a stormy future amid a liquidity crunch and rising defaults

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Published 2 years ago on Oct 29, 2018 21 minutes Read
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When the reticent Ravi Parthasarathy suddenly resigned on July 21 as the non-executive chairman of Infrastructure Leasing & Financial Services (IL&FS), the holding company of the IL&FS group, which he served for over 30 years, no one quite expected the IIM-A alumnus to set off a financial tsunami over the coming months.

After first defaulting on inter-corporate deposits and commercial paper (CP) worth about Rs.4.5 billion in June, the term lending infra lender saw its long-term ratings being downgraded. The final straw that broke the lender’s back was placed on September 4, when the institution and its subsidiary defaulted on a short-term loan of Rs.1.5 billion from the Sidbi, prompting the institution to sack its chief general manager in charge of risk management.

As it turns out, the infra financing behemoth, with 169 arms, including 24 direct and 135 indirect subsidiaries, is now grappling with a debt of Rs.910 billion, of which Rs.680 billion is secured and Rs.230 billion is unsecured. The term institution, which claims to have assets of Rs.1.65 trillion, had used its short-term borrowings, worth Rs.250 billion, to fund long-term projects which weren’t fetching any revenue and, eventually, with rising cost of capital and projects taking longer to get off the ground, the institution collapsed like a house of cards. With around Rs.160 billion stuck in claims and termination payments, the writing on the wall was only getting clearer.

The entire board has been sacked and the Serious Fraud Investigation Office is investigating irregularities. The government is trying its best to soothe nerves of the financial system, but the damage has already been done. NBFCs, the seemingly peaceful island of growth in the financial sector, are suddenly in the throes of a liquidity crisis. Jayanth Varma, professor of finance at IIM-A, believes that the problem was waiting to happen. “Infrastructure projects in the country haven’t done well partly because of the problem in the real economy and partly because the financial sector lent out loans which shouldn’t have been given out in the first place.”

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