Is IL&FS the next Satyam or Indias Lehman brothers?
What happened was a typical stock market phenomenon than the actual reflection of the sectors health or the inherent strength of the balance sheets. While it is true that IL&FS is facing issues, but that should not be extrapolated to say that the whole sector is facing a crisis situation.
I support this. If you step back a few months, the financial stability report issued by RBI in June 2018 talked about this inherent strength. The capital adequacy ratio, average for the sector stood as on March 2018 at 22.9% and in that stability report. RBI also talked about conducting stress test on the credit risk of the NBFC sector. While doing a three level stress test of increasing the NPAs hypothetically, the figures projected were that the sector on an average will continue to have a capital adequacy of above 20% against the prescribed norm of 15%. This clearly shows the inherent strength in the system.
What we saw in the market was more of a panic reaction and while there are certain concerns relating to liquidity, there are various factors contributing to it, including payment of advance taxes.
With the IL&FS developments, there has been a certain loss of confidence in the market. But it should be seen more as a de-rating of growth. The growth which was galloping may slow down. But I do not see any crisis situation out here. That was been blown out of proportion.
Should the government help out IL&FS as LIC is the largest shareholder?
We have to look at it holistically. The government should intervene to the extent that this does not become a panic button which it seems to be happening. I would refrain from talking about the company but the intervention level has to be to the extent to ensure that things do not go horribly wrong for the sector because of one stray incidence. Suddenly you create a crisis situation and the intervention only has to be to that extent.
Are you saying that there is a no systemic issue right now? If cost of funding goes up, liquidity needs to be slightly higher and growth rates will be slower.
There are two things here. One, for various reasons, cost of borrowings may go up on various equations and we may see some temporary liquidity crunch coming in. But to say there is a panic situation is wrong.
For a vast majority, the business model is different. It is not into long-term lending. The NBFC model ending tenure on an average for three to five years, This talk of asset liability mismatch is wrongly placed. It can only be said for companies which are into long-term project financing and which could also include the housing finance companies.
But the typical NBFCs are more into retail lending where the ticket sizes are small and tenures are hardly three to five years of an average. So, there is no question of any asset liability mismatch. Yes, the cost of borrowing will go up, but not to the extent of creating a panic in the sector. The sector is strong enough to withstand all these adversaries.
If a few big assets come in for asset quality issues, would the risk taking capacity in the system become very low? I am talking about corporate banks overall?
Not really. If you talk of banks, just yesterday or day before, we had none other than the SBI chairman himself restating and reposing his confidence in the NBFC sector. Look at this way. If there was any question on the confidence of the sector, why would RBI issue guidelines on co-origination which talked about banks and NBFCs coming together and doing a co-lending model to the priority sector?
So, it is not a systemic issue, not a sectoral issue, it is a one-off incident which has suddenly sparked and created panic in the system. Yes, there are certain liquidity concerns and also concerns relating to the cost of borrowing going up. But let this only be taken up as a reflection on may be the growth rate coming down but I do not see any credit crisis developing.