New Delhi: The government fears that crisis-hit Infrastructure Leasing and Financial Services (IL&FS) may have its fallout on non-banking finance companies (NBFCs) and housing finance companies (HFCs) in the next six weeks in case additional liquidity is not provided.
In a letter dated October 26 to corporate affairs ministry, the department of economic affairs (DEA) described the financial situation as still fragile and feared "significant default from NBFCs and HFCs."
The DEA letter has noted that a prolonged liquidity crunch could hurt fund mobilisation in the debt market, impact productive sectors and affect economic growth at a time when India has emerged as one of the fastest growing major economies in the world.
The DEA has estimated that about Rs 2 lakh crore of NBFC/HFC debt would be due for redemption or rollover by the end of December 2018. It has assessed a funding gap of as much as Rs 1 lakh crore by the end of the year if the pace of fundraising seen in the first half of October (about Rs 20,000 crore or 68 percent lower than the same period in August) is sustained. The letter further said that about Rs 2.7 lakh crore of commercial paper and non-convertible debentures will be due for redemption over January -March 2019.
“Without additional liquidity support a significant default from among the largest NBFC and HFC could occur within six weeks and the financing cycle of productive sector would be adversely affected,” the letter said.
The DEA's fears bring to the fore key issues in the ongoing tussle between the Reserve Bank of India and the government.
The government wants the central bank to provide liquidity support to NBFCs and HFCs fearing any delay could lead to the problem spilling to other sectors. But the RBI does not agree with it and maintain that liquidity situation is under control. It has refused to relax its rules for weak banks grappling with the NPA problem.
It may be noted that NBFCs and HFCs play a key role in ensuring sufficient credit flow in the economy. In line with their business model, they borrow from banks and mutual funds to finance their loans. But after the IL&FS default, which led to the sale of debt and redemption in mutual funds- with outflows of Rs 2.11 lakh crore in September, NBFCs’ source of funding has dried up.
