The term anniversary owes its origins to the Latin word ‘anniversarius’, which means returning yearly. In India’s political economy, an anniversary is frequently a milestone marking the persistence of status quo and commemoration of denialism.
In June 2018, Infrastructure Leasing and Financial Services, a shadow bank promoted by state-owned banks and private lenders, delayed repayment of inter-corporate deposits. The writing was in the books and its lack of solvency was the buzz among the cognoscenti. A series of defaults followed, triggering a stampede of rating agencies racing to downgrade IL&FS to junk status.
On September 21, around noon, the BSE Sensex plunged 1,377 points. The cause was speculation about a housing finance company triggered by the sale of its bonds by DSP Blackrock mutual fund. The name of the company: DHFL. On June 4, 2019, DHFL missed interest payments of Rs 1,000 crore. A day later, rating agencies ICRA and CRISIL downgraded DHFL’s rating from A to D for default.
In June 2019, the outstanding dues of IL&FS are estimated at Rs 99,354 crore and those of DHFL at Rs 102,500 crore—that is a total of Rs 201,854 crore.
The creditors, including depositors, mutual fund investors, banks and companies, cannot access their own money until those tasked with managing the financial sector untangle themselves from the liquidity and solvency debate. It is true that there are cosy cabals operating in the financial market who game the system. Equally true is the fact that none of the regulators have covered themselves with glory.
Fact is delay and denial has been the theme song of the season. Yes, the Serious Frauds Investigation Office is looking at the role of executives, directors and auditors at IL&FS. But what about the role of the RBI, which knew of the mess in IL&FS since 2015? Who is rating the rating agencies which, like the police in Bollywood movies, wake up after the event? Can the agencies explain what kind of due diligence is followed while rating companies—both in persisting with ‘A’ plus ratings and downgrading to junk overnight?
The Securities and Exchange Board of India has issued notices to mutual funds questioning funding against promoter shareholding. The question SEBI needs to answer is what was it waiting for till funding against promoter shareholding had grown into a business segment estimated to be around `1 lakh crore. It is undeniable that the regime of pretend and extend has resulted in a credit freeze—with the worst-hit being the MSMEs.
The crisis owes its genesis to structural issues and aggravation to apathy. Banks were starved of capital following the rise in NPAs to Rs 10 lakh crore—14 banks were under prompt corrective action. The business moved from banks to NBFCs. The money NBFCs raise is again from the same eco-scape—using instruments such as CPs, ICDs and bonds they borrow from investors/depositors, mutual funds, corporates and banks. The business model of NBFCs is just as fragile as that of banks because both deploy short-term money in long-term credit
Financial markets are like circuits wired in serial—if one bulb burns out, the entire circuit blows out. Systemic risk can be triggered by any of the factors—access, availability and affordability. Downgrades preclude access, liquidity shortage shrinks availability, and both can impact affordability. Each of the verticals is faced with the threat of liquidity and solvency. NBFCs are the worst-hit—the loans they have extended run the risk of delayed repayment or turning bad given the slowdown, and poor appetite for debt papers could derail their viability. For mutual funds, the surge in redemptions and lower inflows could be aggravated by stalled or stranded repayments—as is the case with IL&FS and DHFL.
The tragic truth is that those whose money is stuck in IL&FS are no closer to their hard-earned funds than they were in September. Again, IL&FS and DHFL are not the only NBFCs in trouble—a large housing finance outfit, a financial conglomerate which ironically has an asset reconstruction arm, an NBFC with an asset management company, and a private sector bank are all enveloped in rumours.
The NPA crisis is over five years old. The NBFC contagion blew out last year. Do the regulators and mandarins know the magnitude of the possible blowout? Why is there is no sign or discussion on a systemic solution—a la SUTTI, which was set up after the UTI crisis, or a TARP-like structure? Why not deploy the wasted NIIF? Why not park a part of the windfall from RBI reserves to fund an entity within NIIF to assess and monetise assets and corral the crisis?
It would seem the RBI and the mandarins at the Ministry of Finance are discounting the magnitude of the problem. Mere pious platitudes such as ‘we are keeping a watch’ or ‘necessary steps will be taken’ are well past their sell-by date. NBFCs are critical for growth—the fall in consumption is the result of flailing last-mile connectivity between credit and consumption. Debt mutual funds account for Rs 15 lakh crore of the Rs 25 lakh crore industry leveraging savings for growth. The catchment depends on the hard-earned savings of lakhs of unitholders.
Systemic credibility skates on thin ice. The next blowout will have both economic and political consequences.
Shankkar Aiyar
Author of Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
shankkar.aiyar@gmail.com