An issue that queered the pitch in the central bank-government relationship is the liquidity window for Non-Banking Finance Companies (NBFCs). Ever since the default by Infrastructure Leasing & Financial Services Ltd in August, mutual funds and banks turned wary of lending to NBFCs.
The NBFC industry suddenly found itself in a corner. Mutual funds, faced with a record outflow, stopped lending. Banks still reeling under bad debts also tightened their purse strings.
It is all gloom and doom for the NBFCs, at first glance.
But a tweet from the Economic Affairs Secretary, Subhash Chandra Garg, last week conveys a different message on the broader health of the financial markets.
“Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4 per cent during the week and bond yields below 7.8 per cent. Wrath of the markets? Garg tweeted Friday. To put his observations in context, the rupee had hit a low of 74.48 last month, yields were at 8.23 per cent, and crude oil was at $86.7 a barrel.
While Gargs tweet may have been aimed at deputy governor Viral Acharya, who had said that a nation that cripples the independence of regulators would earn the wrath of financial markets, the observations also capture the reality that many seem to be missing.
Indias economy and markets are better placed than those at peers. In the June quarter, the gross domestic product expanded 8.2 per cent, the fastest among major economies. The Sensex is up 2.4 per cent for the year; Shanghai is down 14 per cent at multi-year lows. The usually hawkish Reserve Bank of India (RBI) did not raise interest rates last month when every other central bank did so.
After the IL&FS default, not a single NBFC has followed suit, at least to date. Indiabulls Housing, DHFL and PNB Housing were able to raise funds from the market, albeit at a higher rate. Is there a crisis at all? Or is it a squeeze that is being projected as the end of the road?
Last week, a lender rushed to a bank for an immediate line of credit. Not that it was denied loans by the market, but mutual funds that subscribe to Commercial Papers (CP) demanded 9.25 per cent instead of the 7.25 per cent they charged a few months ago.
Have the funds dried up or is cash coming at a price? For many, it may be the latter, and some may be staring at demise.
To be sure, life as an NBFC was pretty unrealistic in the past few years.
Mutual funds were lending short-term at 50 to 100 basis points above the policy rate to fund 15-year mortgages. Shares of NBFCs such as Bajaj Finance, Cholamandalam Finance and Indiabulls were trading at more than four times their forward year book value. By contrast, SBI and ICICI Bank were quoting either less than, or pretty close to, their books!
When stock prices crashed after the IL&FS default, it was time to not only highlight the funding problems at NBFCs but also to begin a long overdue correction in NBFC stock prices. Linking the meltdown in NBFC stocks, an inevitable fallout of credit tightening, to a conclusion that the industry is in crisis amounts to misdiagnosis.
Heres an industry in transition. Some badly managed NBFCs will fail in this current bound of correction that puts a price on the funds raised. Profitability would erode for others.
Financial markets are in fine fettle, going by Gargs tweet. So wheres the crisis? It cant be both.