NBFC (Non Banking Financial Company) lending which is considered as a shadow banking of economy is in a severe crisis. After 1 year of NBFC crisis, there are many questions arise in Investor mind. Is NBFC crisis going to over in near term? or it is a prolonged problem ? or it complete extinctions NBFC sector? Questions are many but there are no clear answers.
Let us understand what led to NBFC crisis :
- One of the main source of funding of NBFC is Banks & Mutual Funds. They borrow Short Term & lend for Long Term. Which always led to asset liability mismatch.
- NBFC lent to developers of long-term projects, which got held up because of various factors. Trillions of rupees are locked in real estate, construction, and infrastructure projects.
- Corporate Governance issues popped up in many NBFC .
- The promoters, who had pledged shares of their firms to borrow money, are neither able to borrow more to complete projects nor sell them to others. They are entering into “standstill agreements” with banks and mutual funds to ensure those shares are not sold and they continue to run the firm.
- Due to Liquidity squeeze, the cost of borrowing of NBFC shot up & as a result, their margin got squeezed. Small NBFC not able to lend as cost of borrowing started increasing.
- Banks & MF started cutting their exposure & lending to NBFC due to a Liquidity crisis
Steps taken by RBI ?
While interventions by the Reserve Bank of India are helping Indian credit markets regain some normalcy. The RBI has pumped a huge amount of liquidity into the system over the last eight months. It has also eased some norms to give NBFCs more room in fundraising.
What should Investors do during this crisis?
An Investor has no need to panic, but certainly, a reason to be watchful. A “liquidity crisis” forced non-bank lenders and housing finance companies to rely heavily on selling down loans for funds to Banks. As a result, many private Banks with strong balance sheets are able to take advantage of this crisis. Private Banks will benefit from this crisis. Also bigger NBFC with strong balance sheet will become bigger. Investors have to keep in mind all these relevant factors before investing in NBFC.
Happy Investing!!!
CA Tapan Doshi – (M) 919726483113, Email id-tapydoshi@gmail.com
Investor Advisor – Stock Broker – Kotak Securities Franchise
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