The Impact of Government Intervention on the NBFC Crisis

INTRODUCTION

Recently, the NBFC business has grown very popular. NBFC industry. NBFCs play a key role in addressing the many financial needs of bankers excluding customers to promote integrated development in the national market. NBFCs have a key role to play in implementing new financial services for micro, small and medium-sized companies (MSMEs). NBFCs are companies formed in accordance with the Companies Law (1956) which provide for loans and advances, acquisition of shares, bonds and debentures issued by government or local authorities, or other marketable securities, such as loans or leased insurance undertakings. Asset quality for evaluation of NBFCs is one of the most important criteria. The NBFCs' business is to take credit risk and profit after taking the anticipated credit expenses into account. Asset quality assessment is an asset assessment to evaluate the credit risk associated with an asset quality review. Assets quality assessment It also analyses the procedures of credit management. For NBFCs to function as an ongoing concern for future development, profitable transactions are vital. To examine the total effect, the contributing elements to the profitability of an NBFC are evaluated. Analyze the historical coverage, solvency, liquidity and profitability statistics for Assets Review. The grade of asset quality indicates the amount of possible credit risk connected with the loan and investment portfolios. Assets Quality Review follows various types of risk process i.e. operational risk, Financial Risk, Market Risk, Procedural Risk. • Operational Risk: Project Status, Offices, Business Cycle • Financial Risk: Debt Equity Ratios, Profitability Ratios, Liquidity Risk • Market Risk: Industry Analysis, Market Demand & Supply Condition • Procedural Risk: Submission with rules & Procedure related to penalty of loan. NBFCs and Indian Economy -The following are the major contributions of NBFCs towards the growth of Indian Economy: • Mobilization of Financial Resources • Providing long term Credits • Enhancing the Financial Market • Future improvements with NBFCs

Asset Quality Review- Asset Quality Review (―AQR‖) is the evaluation of an asset to measure the credit risk associated with it. It also evaluates the credit administration processes and helps identify the deficiencies in the processes. As a concept, an AQR endeavors to ascertain the true value of the asset/loan on the books of a lender, considering the Repayment capacity of the borrower, value of collateral security provided by the borrower, analysis of financial statement of the borrower, legal enforceability of the collateral security, other industry and market factors. AQR provides important guidance to value the loan closer to its realistic value and make timely provision/ write off, as the case may be.

OBJECTIVES OF THE STUDY:

• To study the reasons of NBFCs Crisis in India. • To study the COVID-19 impact on NBFCs/Banks. • To study the need of Assets Quality Review (AQR) on NBFCs.

The present study based on the descriptive type of research. This paper is based on secondary data mainly focuses on Literature review, Research Paper, Journals, websites. The data is also collected from Government websites. sector in India. Many corporate, mutual funds, and insurance companies have invested in Commercial papers of the IL&FS group. In January – March 2019, excluding gold and personal lending decreased by 31%. Overall, the loan from NBFCs to NBFCs reduces by 6.1 per cent from Rs. 9.65 lakh crores (2017-18). For the 2018-2019 financial year, NBFCs evaluated the trade sector funding stream for 29.6 percent. Such sector as Automobiles, MSME is the higher contribution of NBFCs.

NBFCs accounted for ~29.6% of the flow of funds to the commercial sector in FY 2018-19. In sectors such as automobile, real estate and Micro, Small & Medium Enterprises (―MSME‖), the contribution of NBFCs is higher. Also, ~40% of the incremental consumer financing in FY 2018-19 was done by the NBFCs. In addition to planning and developing infrastructure projects, IL&FS is also a "shadow bank" Infrastructure Leasing & Financial Services. ‖On Aug. 27, 2018 IL&FS defaulted in repayment of ~INR 450 crore of inter-corporate deposits (ICDs) to the Small Industries Development Bank of India (SIDBI). In September 2018, IL&FS and its subsidiary, IL&FS Financial Services, also delayed payments on ICDs and commercial papers, instruments that mature in less than a year. The consolidated debt of IL&FS is estimated at ~INR 90,000 crore. Rating agencies, such as ICRA and Care Ratings, downgraded IL&FS and its certain subsidiaries from investment grade to junk in September 2018. While the sudden and sharp downgrade in credit rating led to decline in the value of NCDs and bonds issued by IL&FS/ its subsidiaries and affected the mutual funds which invested in those instruments, it significantly dented the market sentiments on NBFCs in general. In FY 17-18, the group incurred a net loss of ~INR 2,100 Crore while, in the same year, short-term debt (payable within 12 months) alone went up by ~INR 13,600 crore. Every subsidiary and every SPV have taken use of their reputation/market status (major parts of which, it should be noted, are not actually earning). The function performed by the board of directors is sharply concentrated here. The Board is always short in directing the policy and in overseeing the execution of the approved policy, and the Board has not carried out its fundamental responsibilities in this case. The risk management committee had not met after July, 2015 indicating complete negligence of corporate governance. IL&FS‘s defaults had a significant impact on India‘s credit markets. According to Moody's Investor Services, the outstanding debentures and commercial papers of the company amounted to 1%

loans, approximately INR 57 000 crore. Defaults have caused Indian lenders a greater difficulty, fighting already against a large pile of bad loans. 1.2. Reasons for the NBFC Crisis in India: The main reasons behind the NBFCs crisis are as follows: (a) Asset liability mismatch: Indian NBFCs borrowed and lent the money for the short term. The failure to match this asset obligation was clearly a formula for a catastrophe. IL&FS crisis made the faulty business model of the NBFCs more weak. Since the NBFCs were not able to issue new debt in order to roll over the old debt. (b) Bank and Mutual Funds: Mutual Funds which bought short term securities issued by NBFCs for 90-120 days and which also subscribed to their NCDs/Bonds. (c) Asset quality issues: The Major reason for the crisis was the high cost of borrowing, the contribution of asset quality i.e portfolio concentration of the NBFCs cannot be ignored.

► The NBFCs sectors were giving the real estate sectors funds to start newly projects, construction. ► The real estate sector is conflicting to secure liquidity. ► The profitability indicators of NBFCs is to return on assets, return on Equity down by financial year 2018-2019. ► The NBFCs crisis has also historically reduced the borrowings of the aspect homebuyers.

Although the NBFC industry expanded from 26.2 LKH crore in FY 2017-18 to 30.9 LKH crore in FY 2018-19, in the post-IL&FS events rating declines and liquidity stress have led to a weaker growth rhythm than in FY 2017-18. Return on assets (RoA), equity rates (RoE) and net interest margin (NIM) metrics were decreasing in FY 2018-19, indicating industry stresses. In almost every category, NBFCs NDSI led to the overall decline in profitability.

NBFCs have been ongoing a large assets-liability mismatch. NBFCs are given to run mismatches in the short term maturity periods. Liabilities in every class are increasing compare to the assets with the same period of maturity. LIC Housing Finance As we can see in above table, the subject company has asset-liability mismatch in mostly all categories of assets/liabilities classified with respect to their maturity. Liabilities in every class are exceeding compare to the assets with same period of maturity (except maturity above 5 Years). India bulls Housing Finance

The worsening of asset quality was recorded for the NBFCs in FY 2018-19. While the GNPA ratio was increasing, the net income ratio (NNIAs) was slightly reduced, while capital adequacy deteriorated. The asset quality of the industry showed a marginally rise in the GNPA ratio in FY 2019-20 (up to September). In terms of composition of assets, the share of standard assets decreased, part of which in FY 2018-19 was reduced to the class of under standard assets. While the percentage of under standard assets remained constant in H1 of fiscal year 2019-20, there was a rise in the proportion of dubious assets throughout the review period.

A complete AQR has not yet been passed on to NBFC (and Housing Finance Corporations). NBFCs are also more exposed than banks to stressful industries like immobilisation and construction. Some NBFC loans continue to show up as performing with substantial, back-end scheduled repayments even if the borrower is unable of repayment. Reported bank advance fraud increased from FY18 to Rs 64500 crore in FY19 from INR 22,500 crore. Under a shadow of governance problems and, in some instances, suspected wrongdoing, top profile managers/management team had to go on. Severe failures in IL&FS governance continue to occur. In an outstanding June 2019 analysis by REDD, many NBFCs may be utilising "box arrangements" to cover up financing from their own developers and associated parties. A serious misbehaviour is waged on the ecosystem by some financial, promotional, political, bureaucrat, auditors, rating agencies and other players. A confidence gap of this magnitude is the greatest nightmare and must be addressed of any financial environment. The administration needs to develop a system that allows NBFCs to sell and raise liquidity. The right NBFCs for banks to expand their credit lines, especially in the car and real estate sectors, need to be identified. Banks may establish a debt settlement system so that the money that arrives may be utilised to repay and not be diverted to bank lending. The entire loan comprising NBFCs should be monitored every quarter by the RBI, aside from banks. At now, the apex bank monitors just banks. It should also look at the NBFCs and system liquidity in order to take up needed to overlap NPAs. In order to resolve our NPAs, the Insolvency and Bankruptcies Code (IBC) is an useful law. However, lawsuits, delays and the full magnitude of the issue have delayed this proceeding. The judicial system has strongly to be strengthened and the IBC implemented effectively, to guarantee that the resolution procedure is implemented in a timely way. The whole of the ecosystem — banks, capital markets, auditors and rating agencies as well as regulators, as well as industries like real property and electricity – has to be reformed thoroughly. We are waiting for acceptance and execution, ready and practical suggestions.

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M.Com (Finance), Hemwati Nandan Bhauguana Gharwal University (A Central University), Srinagar, Uttarakhand hkaushik345@gmail.com