Impact of the crisis

On Aug 17- CARE changed the rating of NCDs to AA+ from AAA.

On Aug 24- India Rating changed the NCDs rating to AA from AAA.

On Sept 10- ICRA and CARE downgraded the IL&FS NCDs to BB from AA+.

On Sept 17- ICRA downgraded the ratings of IL&FS NCDs and CPs to the default category (Tambe, 2019). These CRAs were only charged a meagre fine for delaying the down-rating of these securities. Had they updated the ratings in time, the effects of the defaults would not have been so severe (Kaur, 2020).

Impact of the crisis

MSMEs5 (Micro, Small and Medium Enterprises) depend greatly on NBFCs for loans and credit to advance their businesses. NBFCs become the preferred choice over banks for loans, especially for smaller businesses, because of less stringent eligibility criteria, easier approval for loans, minimum paperwork, competitive interest rates, and the provision of loans even with less credit score (which is highly likely for the riskier sectors like MSME)(“Banks or NBFC, ” 2019). However, less stringent norms have led to excessive and abusive lending - as was seen in the case of IL&FS. Regulatory bodies should enforce a system with adequate regulations that still facilitates finance for less creditworthy bodies.

Some major conflicts of interest were observed in both the major crises studied in this paper the subprime mortgage crisis of 2008 and the IL&FS crisis of 2018. These ratings become the basis of investment decisions by everyone from the common man to the biggest investment bank. This system does not always work in the interest of the market and a more robust system needs to be envisioned, which will provide honest information and will also warn investors of impending doom well within time.

After the financial crisis which shook global markets in 2008, India in 2018 has been massively hit by the IL&FS crisis, which has affected the stock market, debt market, equity market, and created a liquidity crunch. NBFCs and HFCs (Housing Finance Companies), domestic debt markets, and banks have become vulnerable due to the IL&FS crisis (Chanda, 2019). The major sectors affected by the crisis are as follows:

Automobile Sector - The auto sector makes up 49% of India’s manufacturing GDP but due to NBFCs’ reduced lending, car sales dropped for 8 straight months till June 2019 and in July 2019, sales dropped as much as 30% (Reuters, 2019).

Real Estate Sector - NBFCs had emerged as a preferred source of financing for real estate developers and home buyers. But after the IL&FS crisis in Sept 2018, lending by NBFC was

5 MSMEs are either manufacturing or service enterprises. They are classified based on two aspects investment in plant and machinery, and annual turnover (Vasal, 2020).

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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

6 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.

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