After IL&FS fiasco, MF redemptions up to Rs 2 trn can support NBFCs: Report

The default by IL&FS may be a one-off case and the response by policymakers suggests it is unlikely to blow into a systemic problem, says a report by economists at largest pvt sector lender HDFC Bank

Mutual fund redemptions amounting to Rs 2 trillion by investors following the IL&FS crisis will help in supporting other NBFCs and restrict spillovers into the real economy, a report said Friday.

The report by economists at private sector HDFC Bank said estimates suggest Rs 2 trillion have moved from MFs back to banks as investors pulled out of the liquid and fixed income funds that had supported NBFC funding.

"With this windfall in deposits, banks could use it to buy good quality assets from the NBFCs. This we believe is a more probable scenario and could help ease a lot of liquidity related worries going forward," it said.

However, it flagged worries around high-risk folios and doubted if they will find buyers and also to some sub-prime worries on loans to small businesses and auto.

It can be noted that banks have already declared an interest in portfolio buys from NBFCs, led by SBI announcing a three-fold increase in its target to buy portfolios to Rs 450 billion.

Lending by non-banks to fund consumer durable buys, small businesses and housing will be impacted in case of a liquidity crunch, it said.

The default by IL&FS may be a one-off case and the response by policymakers suggests it is unlikely to blow into a systemic problem, a report by economists at largest private sector lender HDFC Bank said.

In the short-term, it is more of a "confidence issue" and the uncertainties will be troubling the markets, it said.

It can be noted that over the past few weeks, in a rising interest rates scenario, concerns have been raised about potential asset-liability mismatches at NBFCs who borrow short and lend long. This has led to a liquidity problem and forced policymakers to intervene.

"In case of a liquidity shortage, there could be some slowdown in the advances made by the NBFCs and sectors like consumer durables, MSMEs, and housing could be affected to some degree," it said.

In the last five years, to FY17, share of NBFCs in the consumer durables financing has jumped to 32 per cent from 19 per cent, while the same for industrial sector has declined since September 2016, and for micro, small and medium enterprises have seen a 35 per cent growth.

NBFCs' share in total credit has increased from around 5.5 per cent in December 2015 to around 10 per cent by March 2018, it said.

If banks step up lending to these areas where NBFCs had become stronger, the impact on the real economy will be marginal, it said.

Swiss brokerage UBS, however, said that a slowdown in lending by NBFCs will hurt macro growth and possibly discretionary consumption.

Explaining the enormity of the liquidity problem staring at us, HDFC Bank economists said up to Rs 1 trillion of NBFCs short-term borrowings are coming up for refinance till March.

"While we do not see the prospect of a major crisis, there are some legitimate questions about redemptions and rollovers including the possibility of default. This could in an extreme situation foster contagion across this lender class and disrupt the money and debt markets," it said.

Policymakers can deploy various tools, including a special liquidity window akin to the one opened in face of the 2008 financial crisis, it said, adding that it will be a "last resort".