A series of downgrades in the last two weeks has triggered fresh fears of another liquidity crisis in the non-banking financial company (NBFC) sector. Notably, the sector is still under recovery after the default of Infrastructure Leasing & Financial Services (IL&FS) sent shock waves in the economy in September 2018.
In the past few weeks, credit rating agencies have downgraded the rating of certain debt instruments of Reliance Capital firms Reliance Commercial Finance (RCFL) and Reliance Home Finance (RHFL) to "default", or D. The rating agencies attributed the downgrade to its deteriorating financial profile. A "D" rating means that the instrument is either in default category or likely to be in default.
According to Mint, rating agencies CARE placed PNB Housing Finance Ltd (PNBHFL) on a rating watch due to its inability to raise money to maintain comfortable capital adequacy and gearing level. Moreover, insurance watchdog Insurance Regulatory and Development Authority (IRDAI) on Friday cautioned that the insurers having exposure in the RCFL and RHFL will have to make provisions for debt after their downgrade.
The NBFCs continue to struggle after the IL&FS fiasco and fear of defaults at many big fishes in the market including Essel group. Earlier this year, mortgage lender Dewan Housing Finance Ltd (DHFL) was also downgraded due to its inability to raise fresh funds.
The default sent contagion effect in the economy, especially in the NBFC sector. Several debt market investors including mutual funds applied brakes on their lending activity hence further deteriorating the liquidity supply for NBFCs and housing finance companies (HFC).
Industry experts are if the opinion that the latest downgrades are certainly going to infuse fresh concerns of asset-liability mismatch which eventually could further shoot up the cost of funds for the NBFCs and HFCs which are already struggling due to the liquidity crunch.
Umesh Rewankar, managing director and chief executive, Shriram Transport Finance said "cost of funds for NBFCs have gone up by 50-60 bps over the last seven months. The recent events have led to a situation where NBFCs could face a challenge in terms of the availability of funds. So, the next week is crucial as it will decide whether the cost of funds will go up further."
Earlier this week, in an interview with Bloomberg, HDFC Bank's Managing Director Aditya Puri said that the troubles among India's non-bank financiers in expected to continue for at least a 12-18 months even if the full-blown crisis is over.