Five years back from now, the finance world witnessed a mega crisis that shook not only the NBFC space but the entire industry altogether. Infrastructure Leasing & Financial Services (IL&FS) was established over three decades back, and the conglomerate funds infrastructure projects across India.
The blow-up of IL&FS was one of the biggest financial crises with the debt involved about Rs 1 lakh crore. LIC, SBI, Japan’s Orix Corporation, HDFC and CBI are some of the key stakeholders of the NBFC.
IL&FS fell short of cash and defaulted on several of its obligations. New infrastructure projects dried up, and running construction projects faced cost overruns amid delays in land acquisition and approvals.
This led to default on repayment of bank loans, including interest, term and short-term deposits as well as the NBFC failed to meet commercial paper redemption obligations.
Following the defaults, rating agency ICRA also downgraded the ratings of its short-term and long-term borrowing programmes.
It was five years back between September 21 and 24 that the crisis hit the market caps of large NBFCs like HDFC and Bajaj Finance’s market cap erodes by around Rs 18,600 crore and Rs 13,800 crore, respectively. Twelve other NBFCs including L&T Finance Holdings, DHFL, and Indiabulls Housing Finance also witness a sharp fall in market cap.
Here’s the timeline:
In June 2018, IL&FS defaults for the first time on repayment of commercial paper and inter-corporate deposit worth Rs 450 crore. Later in July 2018 company’s Non-executive chairman Ravi Parthasarathy resigns after over 30 years of services. He was replaced by Hemant Bhargava, managing director of Life Insurance Corporation of India (LIC).
In September 2018, NBFC defaults on repayment of a Rs 1,000 crore short-term loan from SIDBI, alarming credit rating agencies. This led to downgrade of ratings by ICRA.
The crisis hit the market caps of large NBFCs. Between September 21 and 24, large NBFCs like HDFC and Bajaj Finance’s market cap erodes by around Rs 18,600 crore and Rs 13,800 crore, respectively. Twelve other NBFCs including L&T Finance Holdings, DHFL, and Indiabulls Housing Finance also witness a sharp fall in market cap.
In October 2018, effect of NBFC rout spreads like a wildfire across the stock and debt markets. Bond prices fall due to the sell-off and yields continue to rise, making it more expensive for NBFCs to borrow. The average cost of borrowing for corporates has gone up by 100 bps since April 2018.
Another key NBFC – Anil Ambani-owned Reliance Home Finance defaults on loan repayment of Rs 40.08 crore to Punjab & Sind Bank in February 2019.
Later in May 2019, it was observed that the investors flock to strong private NBFCs such as HDFC and quasi-sovereign financing companies like Rural Electrification Corporation, Power Finance Corp, National Bank for Agriculture and Rural Development, National Housing Bank, and LIC Housing Finance.
DHFL: Another entity raises alarm, RBI comes into play
DHFL, one of the leading housing finance companies, in June 2019, fails to repay commercial paper worth Rs 225 crore due to the lack of liquidity and inability to raise fresh funds.
In July 2019, RBI Governor Shaktikanta Das said the central bank is taking steps “to ensure a collapse of another NBFC, especially a large one, doesn’t happen.”
In August 2019, the primary source of funding – Mutual funds – turn extremely cautious. The exposure of debt mutual funds to the sector drops by 20% year-on-year.
In December 2019, RBI observed that bad loans in NBFC sector have risen between March 2018 and September 2019. Higher cost of borrowing and increased risk aversion has led to a drop in loan growth.
The Covid-era
As the Covid pandemic hits the country, RBI offers a three-month moratorium for repayment of loans. However, it was unclear if beleaguered NBFCs can avail of it.
In April 2020, NBFCs seek clarification from the RBI on whether they are eligible for a moratorium. RBI announces long-term repo operation targeted at shadow bankers with a condition that half of the funds availed by banks must go to small and mid-sized NBFCs. It was a failed attempt as the RBI receives a subdued response from banks, which are trying to stay away from risky moves. Later, RBI issued clarification stating that banks can decide if they want to offer a moratorium on repayment of loans to shadow bankers.
It was observed that the Covid induced lockdown started impacting even those NBFCs that had an impeccable record so far.
Later in May 2020, State Bank of India and Punjab National Bank provide moratorium to NBFCs.
Uday Kotak and IL&FS
Nearly two years after taking control of IL&FS, in July 2020, Uday Kotak-led board of directors were been able to resolve only 18% of the company’s outstanding debt.
It lays out roadmap to address over Rs 57,000 crore of debt, which was around 57% of its overall debt of Rs 99,000 crore.
Another two years later, in March 2022, Uday Kotak announces stepping down as non-executive chairman of IL&FS group. Managing Director CS Rajan was appointed as chairman and managing director by the corporate affairs ministry for six months.
By that time, IL&FS had resolved debt to the tune of Rs 55,000 crore. It has retained its aggregate resolution target of Rs 61,000 crore, which is 62% of the total dues.
In the same month, IL&FS headquarters, located at Bandra Kurla Complex (BKC) was sold to Brookfield Asset Management for Rs 1,080 crore. However, the sale was later stuck in court proceedings.
In June 2022, NCLAT directed the new board of the debt-ridden IL&FS Group to distribute Rs 16,361 crore of cash and InvIT units available across the Group to its creditors on pro-rata basis.
Chairman of HDFC, Deepak Parekh in November 2022 on the decision of HDFC and HDFC Bank merger said RBI ‘encouraged’ to go for a merger in anticipation of stringent guidelines to regulate large NBFCs. The collapse of IL&FS and subsequent failures of other leading NBFCs prompted the RBI to tighten its scrutiny on shadow lenders.
In May 2023, NCP Maharashtra chief Jayant Patil Monday appeared before ED to face inquiry in connection with a case on alleged irregularities in IL&FS.
In June 2023, CBI filed case against IL&FS subsidiary – IL&FS Transportation Network – for allegedly defrauding 19 banks including Punjab National Bank, Bank of India, State Bank of India, Axis Bank and Yes Bank.
Mukesh Ambani led Jio Financial Services entered into the NBFC market in August 2023. Hopes are high with the entity and is believed to disrupt the NBFC space.
Former Chairman of IL&FS, Uday Kotak also gave a big thumbs up to Jio Financial Services, saying the company can scale under K V Kamath’s leadership.
