Cast Adrift

The gap in India’s shadow banking segment is widening as institutional investors steer clear of commercial papers issued by smaller NBFCs and HFCs


"It’s the economy, stupid,” the now famous catchphrase coined by Bill Clinton’s campaign strategist James Carville in 1992 set the stage for his victory with the message: the economy matters. That underlying fact was a topic of tense discussion in India in 2018 in the form of the RBI versus the government saga. In a two-year-long battle, two RBI governors stepped down to make way for a handpicked North Block veteran. The new appointee was handed over a battered sector that was at the peak of its worst crisis. “Not a day passed in the past several months when we didn’t discuss or review NBFCs,” said the current RBI Governor, Shaktikanta Das, in an interview to Bloomberg, seven months after his appointment. This crisis also reflected in the new Finance Minister’s maiden Union Budget where the government decided to get banks to lend to the shadow-banking sector. But, what led to the crisis in the first place?

Abhinesh Vijayaraj VP-equity research, Spark Capital

Domino effect

Once called a ‘systemically important’ institution by the central bank, the fall of IL&FS Group began with a series of missed payments, eventually leading to its default. That led to a confidence shaking realisation about the health of non-banking financial companies that were increasingly relying on debt funding. This event roiled the stock market and investor sentiment, triggering a credit crunch for NBFCs. The average cost of borrowing went up by 100 basis points in September 2018 compared to April 2018. And while the economy may be settling down to the storm as liquidity eases, there’s another side to the story. “There is no dearth of liquidity for larger players, whereas smaller and weaker players are facing a liquidity crunch,” says Abhinesh Vijayaraj, vice president-equity research, Spark Capital Advisors (See: Changing dynamics). Analysts claim that it’s taking around two to three months for an NBFC to borrow funds compared to 10-15 days a year ago. “There is a crisis of confidence today as large housing fi


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