Crisis in the Indian Non-Banking Finance Companies (NBFC) Sector

Abstract

Managing one-fifth of credit in the country, the Non-Banking Finance Company (NBFC) is a vital sector for the Indian economy. A series of problems are hurting the Indian NBFC sector since the default of infrastructure finance major IL&FS in September 2018. What seemed to be a liquidity crisis is looming into a solvency issue. Some major players backed by reputed promoters are going out of business. Though the downgrades & defaults do have a considerable impact on the banking and finance industry as a whole, there is sufficient panic-triggering turbulence in certain pockets of the industry. The Housing Finance Companies (HFCs) and the Asset Management Industry are found to be vulnerable and got highly hurt by the crisis. A central issue that led to the liquidity issues in the industry is the asset-liability mismatch. Regulators prefer tweaking macro-economic variables to curtail the problem rather than providing a special liquidity window. The crisis highlighted the need for much closer interaction and the interplay between regulators such as RBI, IRDA, NHB, and SEBI to avert such possibilities in future failing which bubbles like these could culminate to become a systemic risk. Findings from this paper can help various stakeholders from the NBFC, the regulators, and the Government in better preparedness.