IL&FS-led NBFC liquidity crisis has been a wake-up call for the RBI
The IL&FS office building in Mumbai. The general market sentiment is stacked up against non-banking financial companies (NBFC) but some mutual funds have shown the discretion to not shun all of them. Wikipedia

A massive Rs 67,000 crore flight of mutual fund deposits may be behind the liquidity crunch that non-banking financial companies (NBFC), also known as shadow banks, face now, media reports say. The liquidity crisis unfolding in India's shadow banking sector from September had a cascading effect driving mutual funds that had lent heavily to these companies to cut their risk, progressively reducing their exposure.

Some estimates say mutual funds still have a whopping Rs 3.12-trillion exposure to NBFCs and housing finance companies (HFCs), a report in the Mint says. This adds up to 12.5 per cent of the assets under mutual funds' management. The liquidity crisis is threatening to decelerate the national economy's economic growth and is a big challenge to the newly appointed Finance Minister Nirmala Sitharaman in Prime Minister Narendra Modi's Cabinet after returning to power with a massive majority in the Lok Sabha elections. Sitharaman is set to present her maiden Union Budget on July 5. The Reserve Bank of India's (RBI) efforts at pumping in more liquidity into the market have not yet begun showing results.

A series of defaults by the Infrastructure Leasing and Financial Services Ltd (IL&FS) group companies in September 2018 triggered the crisis in the sector. The IL&FS collapse has forced fund managers to write off nearly Rs 3,000 crore NBFC investments, the report says. The recent loan repayment default and rating downgrade of the debt papers of Dewan Housing Finance Ltd (DHFL) have worsened the crisis in NBFC sector and threaten to suck in the mutual fund sector into the vortex. Reports say about 165 mutual funds have exposure of about Rs 5,336 crore to DHFL, many of them more than the 10 per cent single scheme exposure limit that Securities and Exchange Board of India (Sebi) has mandated.

A woman walks past a signboard of Dewan Housing Finance Corporation Ltd. (DHFL) outside its office on the outskirts of Mumbai, January 31, 2019. REUTERS/Francis Mascarenhas/File Photo

However, DHFL paid out its obligation to fixed maturity plans of Reliance Mutual Fund on June 7, according to the report. Asset management companies (AMC) have been reducing their exposure to shadow bans every month by not rolling over their debt and selling their loans.

Mutual funds disclosures show AMCs have cut exposure to group companies of IndiaIndiabulls, Piramal, DHFL, IIFL Holdings, IL&FS and Edelweiss. "Many NBFCs have liquidity, but the sentiment towards the sector is not favourable, which is perhaps the reason for such a swing in exposure," the report quotes Arvind Chari, head of fixed income at Quantum Mutual Fund, saying. "Some of the sentimental concern is based on balance sheet related to real estate exposure or simply the worry that will the NBFC find refinancing or not."

However, mutual funds have not been painting all NBFCs with the same brush, the report suggests. During the period, the funds increased their exposure to some NBFCs such as Bajaj Finance, Muthoot Finance, HDB Financial Services (a unit of HDFC Bank), Kotak Mahindra Investments and Sundaram Finance. "This signifies that AMCs are perhaps not gloomy about the NBFC story and do not see it as a systemic issue," said an unidentified official of an AMC. "Even in NBFCs where we have reduced exposure, we are still convinced of the story. We are adhering to client demands to reduce our exposure to certain NBFCs and HFCs."