As soon as the liquidity crisis was unfolded in the Non-banking Financial Service (NBFC) sector, numerous mutual funds, Provident funds, banks, etc resorted towards safeguarding their portfolios. Lenders initiated to limit their risk by reducing their exposure in these companies by ₹67,000 crores. Mutual funds have pared their exposures in NBFC’s like Edelweiss Group, Piramal Group, IIFL Holdings Ltd, Indiabulls Group and DHFL group.
Liquidity crisis of 2018
The liquidity crisis which deteriorated the NBFC sector was triggered by a series of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) in September 2018. Mumbai headquartered IL&FS operates through its vast network of subsidiaries comprising of more than 250 companies. The company deals in infrastructure development & financial services.
The disintegration in the sector compelled multiple fund managers to write off their investments in NBFC’s amounting to around ₹3,000 crore.
Continuous downgrade in DHFL’s commercial papers
The mutual fund industry witnessed another setback in June 2019 after credit rating agencies downgraded debt instruments of DHFL. Crisil & ICRA downgraded ₹850 crore worth commercial papers of the company to ‘default’ from ‘A4’. DHFL witnessed the downgradation on account of languishing liquidity position.
Asset Management Companies (AMC) have a combined exposure of ₹5,336 crore in the financially stressed DHFL.
However, mutual funds continue to have an immense exposure of ₹3.12 trillion in NBFC’s & housing finance companies. The funds have reduced their exposure to current levels from ₹3.79 trillion in September 2018. The liquidity collapse of 2018 has led to a transformation in investing strategies of mutual funds, Provident funds & AMC’s. Companies have adopted a cautious approach for lending to companies in the NBFC space. Due to the crisis funds have started to liquidate their positions by selling their loans rather rolling over their debt.
Is liquidity still a concern?
AMC’s have adopted an aggressive approach towards lowering their exposure in the NBFC segment. AMC’s attempts to shrink their exposure seems to be sentiment-driven as not all companies in the NBFC sector are undergoing a major crisis. Numerous NBFC’s possess healthy liquidity but unfavourable sentiments for the sector is resulting in severe swings in exposure patterns.
During the same period, funds have raised their exposures in select companies in NBFC space. Companies like Bajaj Finance, Sundaram Finance Ltd, Muthoot Finance Ltd, HDB Financial Services and Kotak Mahindra Investments Ltd witnessed increased exposures. This signifies that funds are not dreary about the NBFC sector. The additional norms introduced by RBI to regulate the NBFC sector has given rays of hope to the investors.