- Asset-Liability Mismatch: Many non-banking financial companies (NBFCs) relied on raising short-term funds by issuing commercial papers to provide long-term loans. When the commercial papers matured, they would simply raise fresh short-term debt. Thus the cycle continued, but then the IL&FS crisis happened. The NBFCs’ over-reliance on short-term funds seems to have led to a huge asset-liability mismatch.
- Small Debt Market: As India does not have a big debt market, banks and mutual funds are the major sources of funds for the NBFCs.
- Banks Cautious: Banks, which are fighting their own battle of reining in non-performing assets, reduced the funding to NBFCs
- Mutual Funds Shy Away: Debt mutual funds, which were hit by their exposure to IL&FS and a few other troubled entities, also started cutting their exposure to the NBFC sector.
- Drop in Management Standards: Availability of easy money from banks, drop in lending standards, ineffective risk management, lack of appropriate checks and balances, improper regulatory norms, and non-transparent and complex business procedures.
An initiative by Avinash Agarwal to provide comprehensive and accurate information, resources, and support for individuals preparing for the UPSC Civil Services Examination.
Saturday, August 17
5 Causes of NBFC Crisis in India
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