Continuing Crisis

The Rs 22-lakh crore Non Banking Finance Companies (NBFC) space grew robustly though the last few years were very challenging. The tide, however, appears to be turning now. With inflation, rupee and interest rates wobbling, there is concern about growing leverage due to reliance on debentures and Commercial Paper. Higher cost CP will replace these, now that interest cycle has reversed. There may be a liquidity crunch as many mutual funds would prefer not to increase CP exposure; they also fear possible redemption pressure because both equity, and debt instruments, prices are dropping. NBFCs face a concentration risk on the assets side too. Many have increased exposure to micro and small loans; in a climate where retail loans (especially consumer durable financing, credit cards and affordable housing) have grown in the last few years. These are very new to NBFCs that are yet to complete a full cycle. With MFs uncomfortable in parking funds in NBFCs, clearly there are tough times ahead. - Anand Adhikari