The non-banking finance companies (NBFC) crisis is threatening to draw in mutual funds (MF) into the vortex as plunging public confidence is threatening to worsen liquidity issues following Dewan Housing Finance Limited (DHFL) default, media reports say. Asset management companies (AMC) that face imminent payout on fixed maturity plans (FMP) are in trouble as finance costs soar throwing up a fresh challenge for new Finance Minister Nirmala Sitharaman, who is busy preparing for the Union Budget 2019 presentation next month.
Reserve Bank of India (RBI) governor Shaktikanta Das said on Thursday after announcing the repo rate cut that the central bank would do whatever it takes to ensure financial stability in the wake of the DHFL default. However, his failure to mention any special liquidity measures or backstop facility for stressed finance companies as the industry had requested has failed to raise public confidence.
The RBI's statement came after three major rating agencies — Crisil, ICRA, and CARE — cut DHFL to default grade. The downgrades have hit the MF industry hard as some estimates say as many as 160 MFs have exposure to DHFL, some of them with more than the Securities and Exchange Board of India (Sebi)-mandated single scheme exposure limit of 10 per cent. The DHFL default and downgrade have come as a nasty jolt to the NBFCs and MFs that have been reeling under the liquidity issues set off by the defaults of Infrastructure Leasing and Financial Services Ltd (IL&FS).
The State Bank of India has clarified that the overall quality of the NBFC asset portfolio in its books continues to be good. "Challenges faced by accounts like DHFL have already been factored in when we have given our estimate for the stress that the bank would have to deal with in FY20 and included in our estimates for slippage and loan loss-provisioning for the current financial year," the bank said, according to media reports.
Although housing finance companies (HFCs) like DHFL are regulated by the National Housing Bank, Das said the RBI was monitoring the situation closely as lenders have significant exposure to HFCs. Some AMCs with exposure to DHFL papers have stopped fresh intakes and begun the process of insulating their accounts from toxic assets, a report says.
Industry observers fear that the tightening liquidity will offset any benefits from the RBI's third successive repo rate cut of the year bringing interest rates to the lowest in nine years. Clouds started gathering over NBFCs and MFs from late last year after the shock defaults at shadow lender IL&FS group. Debt concerns at conglomerate Essel Group and troubles at mortgage lender DHFL have pushed financing costs higher.