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Revisiting the NBFC Crisis
Even while the effort to resolve the crisis resulting from non-performing assets in the banking sector was underway, India’s financial sector was overwhelmed by failures of large non-banking financial companies. In the discussion that followed the collapse of these NBFCs, the emphasis has been on the absence of due diligence, poor financial management and downright fraud. The environment these firms found themselves in did encourage such tendencies, but there were structural reasons as to why these institutions accumulated bad assets, and these reasons are often ignored.
The crisis that engulfed the Infrastructure Leasing & Financial Services Limited (IL&FS) and Dewan Housing Finance Limited (DHFL) focused attention on what was India’s numerous but shadowy non-banking financial companies (NBFCs). The collapse of these two big entities not only affected the balance sheets of banks and mutual fund companies, but also resulted in a credit crunch that dampened demand and pushed a slowing economy towards recession. Clearly these institutions had a role to play that was more significant than what was perceived earlier. Being leaders in the industry, their failure has tarnished the image of the NBFC sector as a whole. This is being compared with the worst examples of shadow banking, or the operations of entities that are not depository institutions but undertake bank-like lending and investment based on money mobilised from the “market.”
In the discussion that followed the collapse of these NBFCs, the emphasis has been on the absence of due diligence, poor financial management and downright fraud. While the environment these firms found themselves in did encourage such tendencies, there were structural reasons as to why these institutions accumulated bad assets, that are often ignored.
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