Seminar 2020
SPA New Delhi
halved to 27000crore in FY '19, and due to the liquidity crunch thereafter, the delivery timelines got skewed. NBFCs also advanced home loans easily, which diminished post the defaults (Press Trust of India, 2019). This led to reduced demand from the consumers. NBFC Sector - The crisis of IL&FS has negatively impacted the NBFC sector. RBI has decided to regulate NBFCs. To that end they have introduced regulations such as liquidity coverage ratios and consolidation schemes that bind NBFCs. Investors are also hesitant in investing in NBFCs (PTI, 2019b).“However, the prolonged liquidity distress will significantly erode the NBFIs' credit standing, and prove negative for the broader economy and structured finance sector,” Moody’s said in a statement (Lele, 2018). Banking Sector - The IL&FS crisis affected the banking sector in positive and negative ways. The liquidity crunch pushed corporate borrowers towards banks taking them away from bond markets. Bond markets turned risky in 2018. And even the bank loans were cheaper than bonds in some cases (Ghosh, 2018). Therefore, more people turned back to banks for loans. However, due to defaults in repayment by NBFCs, the banking sector was in distress due to non-performing assets. Auditing Sector - Tough rules for auditing firms, ban on non-auditing firms, and restructuring the advising companies (Srivastava, 2019), limiting its revenue generation by the corporate affairs ministry Indian Economy - NBFCs are ‘material providers of credit for economy’. Therefore, slowdown in credit growth provided by NBFCs will hamper overall consumption and economic growth. IL&FS being an NBFC, RBI did not exercise as much regulation over its operations as in the case of traditional banks. Credit Rating Agencies - The lack of transparency in this sector has been highlighted by the crisis. The government now plans to tighten its grip over credit rating agencies ICRA, India Ratings & Research and CARE (Mishra, 2019). Investors -Most affected by this crisis are the Investors that include Individuals, Mutual Funds, Companies and Banks that offered loans as "Inter-Corporate deposits6". If the Liquidity crisis extends, consumption will go down even more, weakening the growth further. The requirement is to restore investors' confidence that is troubled about the grasp on other shadow banks, promoting a rise in volatility among financial stocks (Bakshi, 2019). The collapse of an NBFC mammoth (IL&FS) unnerved other investors like Larsen and Toubro, Reliance, and some other mutual funds – who have lowered their assets in such partnerships. This is a clear indication of the lack of trust and confidence of companies in partnerships and Inter Corporate Deposits (ICD) - These are collateralized borrowings that corporates get from other private companies registered under the Companies Act of 1956. Therefore, these are usually at a higher rate of interest. 6
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