Devang Shah, deputy head - fixed income, Axis Mutual Fund
While there has been a lot of noise about credit deterioration, except for IL&FS and ADAG group, we haven’t seen any major defaults in the past six months. Some of the stressed issuers have seen steep downgrades but we believe there won’t be any further significant defaults. Also, when we talk about defaults from a fixed income funds perspective, out of the total AUM size of 13-14 trillion, total exposure to all these stressed groups would be around 250 billion which is less than 2% of AUM. In most cases, mutual fund schemes have already taken marked to market losses for these stressed assets. Post the IL&FS crisis, the worry was that NBFCs/HFCs have not been able to avail credit which will significantly impact their borrowing costs. But I believe today 85-90% of NBFCs/HFC are availing the same amount of credit, and broadly at the same cost of borrowing. Measures taken by RBI and government of liquidity infusion and strengthening the balance sheets of PSU banks have also improved credit flow to the sector.
Pankaj Pathak, fund manager - fixed income, Quantum Mutual Fund
The credit crisis, which started after the IL&FS default, is not yet over. Following a temporary respite, the liquidity issue is again coming to the fore. The entire problem of asset-liability mismatch and disproportionate growth in NBFCs’ assets hasn’t been tackled. In a bid to decrease their leverage, NBFCs will have to sell their assets, but we haven’t seen any major sale of assets happening. And even on the liquidity front, credit premiums continue to be elevated. NBFCs also have exposure to real estate. So there is a concern whether they will be able to offload these assets and create liquidity for themselves. If this liquidity crisis persists, it may lead to solvency issue for many NBFCs. And this will have a contagion effect on other sectors as well. If we don’t witness any concrete resolution, the risk of a credit crisis will remain. PSU banks have stepped up to provide support, but if you look at the bond market, investors are nervous and continue to charge a higher premium and liquidity remains poor.