IL&FS incident is unfortunate, says RBI director S Gurumurthy

IL&FS assets are built for 30 years' return on 10-year finance, says Gurumurthy

Non-official director with the Reserve Bank of India, S Gurumurthy, has said that the Infrastructure Leasing & Financial Services (IL&FS) issue is unfortunate and that NPA rules, applicable only to commercial banks, are not being properly implemented.

“IL&FS assets are built for 30 years’ return on 10-year finance. They have to refinance it every 10 years, which is the structural model of IL&FS,” he said.

“Basel rules are designed for commercial banks, not universal banks, which all Indian banks are, and term lending institutions, which IL&FS and the likes are. Applying NPA norms to them is like asking one to play football, following hockey rules,” Gurumurthy, a chartered accountant, columnist, political and economics analyst and editor of Thuglak magazine, said.  

Besides debt fund managers becoming more selective with their exposures, experts said that HFCs will also have to contend with strong competition risk posed by banks. “Banks have now become more aggressive in the mortgage space and have certain advantages over NBFCs, such as a better liability side,” a fund manager said, adding, “Rising borrowing costs combined with increased competition can hurt the profitability of HFCs.”