IL&FS effect: NBFCs brace for tighter regulation

Reserve Bank of India, last week, warned stricter regulations are in the offing to ward off default risks rising from the so-called asset liability mismatch, reports Bloomberg.

The growth of non-bank financial companies will be a thing of the past, with revelation of money market defaults by Infrastructure Leasing & Financial Services (IL&FS).
 
NBFCs roped in to tap demand for long-term infastructure financing, with banks reeling under bad loans. 
 
With banks struggling with bad loans and low capital buffers, non-bank lenders had rushed to tap demand for long-term financing to build roads, power plants and homes. But these lenders borrowed from the short-term money markets to finance long-term loans, which raised the risk of defaults in cash flows take a hit.
 
Reserve Bank of India, last week, warned stricter regulations are in the offing to ward off default risks rising from the so-called asset liability mismatch, reports Bloomberg. 
 
Terming short-term debt to garner long term gain a “myopic strategy,” Reserve Bank of India (RBI) deputy governor Viral Acharya said the regulator is looking at strengthening guidelines for non-bank lenders to avoid “rollover risks.”
 
NBFCs grew in terms of assets by an average 18 per cent over the past year, said a data compiled by Bloomberg.
 
IL&FS, a huge borrower, accounted for 2 per cent of outstanding commercial paper, 1 per cent of debentures and as much as 0.7 per cent of banking system loans, said the report and added that IL&FS amassed debt of Rs 91,000 crore as of March 31. 
 
The debt-ridden company Infrastructure Leasing & Finance (IL&FS) in now under the control of the government.
 
NCLT has sacked the IL&FS board and asked the government to devise a plan for the group by October 15.
 
The government has constituted a panel headed by Kotak Mahindra Bank’s CEO and Managing Director Uday Kotak, with five other members — ICICI Bank chairman Girish Chandra Chaturvedi, ex Sebi chief GN Bajpai, former IAS officer Vineet Nayyar, Malini Shankar and Nanda Kishore.
 
The tribunal will next hear the matter on October 31. 
 
Source: Bloomberg & Media reports

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