In the New Indian Express, Shankkar Aiyar writes about the NBFC crisis and its implications for financial markets and systemic credibility. Excerpts:
"Financial markets are like circuits wired in serial—if one bulb burns out, the entire circuit blows out. Systemic risk can be triggered by any of the factors—access, availability and affordability. Downgrades preclude access, liquidity shortage shrinks availability, and both can impact affordability. Each of the verticals is faced with the threat of liquidity and solvency. NBFCs are the worst-hit—the loans they have extended run the risk of delayed repayment or turning bad given the slowdown, and poor appetite for debt papers could derail their viability. For mutual funds, the surge in redemptions and lower inflows could be aggravated by stalled or stranded repayments—as is the case with IL&FS and DHFL.
It would seem the RBI and the mandarins at the Ministry of Finance are discounting the magnitude of the problem. Mere pious platitudes such as ‘we are keeping a watch’ or ‘necessary steps will be taken’ are well past their sell-by date. NBFCs are critical for growth—the fall in consumption is the result of flailing last-mile connectivity between credit and consumption. Debt mutual funds account for Rs 15 lakh crore of the Rs 25 lakh crore industry leveraging savings for growth. The catchment depends on the hard-earned savings of lakhs of unitholders."
Read the full article here.