A Paper on

“NBFC crisis and its domino effect on Indian economy”

AUTHOR

Mr. Arjun J
Assistant Professor
Department of MBA
PESITM, Shivamogga.

Mr. Prasanna S N
Student
Department of MBA
PESITM, Shivamogga.

 
INTRODUCTION TO NBFCs
Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or
other marketable securities of a like nature, leasing, hire-purchase, insurance business,
chit business but does not include any institution whose principal business is that of
agriculture activity, industrial activity, purchase or sale of any goods (other than
securities) or providing any services and sale/purchase/construction of immovable
property.
Objective of the study:
To study the emergence of NBFCs in India.
To know the crisis of NBFCs and its effects on India economy.
 

Research Methodology:
The study with respect to the NBFCs crisis and its domino effect on Indian economy is
completely based on the secondary data i.e. published data, News Papers, Journals, reports
etc. it is purely on conceptual study.
 
Crisis faced by NBFCs in India:
That the non-banking financial companies (NBFC) sector has been facing
troubled times for several months is well-known.
Now, a top-ranking government official has proclaimed that the sector is facing
an “imminent crisis.”
What’s the NBFC crisis about?
NBFCs are facing a liquidity crunch. In other words, they don’t have money to lend or are
facing enormous difficulties in raising funds. NBFCs typically borrow money from banks
or sell commercial papers to mutual funds to raise money. They on-lend these money to
small and medium enterprises, retail customers and so on. When NBFCs don’t have
money to lend, that reduces the credit flow to the economy, hits economic growth and
causes many borrowers to default on loans.

What led to this?

There are a couple of things to consider here. One, the NBFC business model itself is
flawed, to begin with. It relied on raising short-term funds which were then lent out as
long-term loans. This leads to a situation called an asset-liability mismatch.
What has been the impact on auto sector?
According to a Kotak Mahindra report, the total auto and car sales figure in the country
is about Rs 5 lakh crores. The monthly sales may be around Rs 40,000 crore. Now a 20%
decline in the Rs 5 lakh crore sales figure would sum up to about Rs 1 lakh crore which
is financing.
NBFCs Crisis to the Mutual Fund:
The Economic Survey for 2018-19 highlighted contagion risks posed by
stress in non-banking financial companies (NBFCs). It has hurt consumption
growth in the automobile sector affecting manufacturing, the Survey said.
FINDINGS
There are several factors due to which NBFCs struggle. One fine day, the market was no
longer bullish about Non-Banking Financial Companies (NBFCs). Instead, their stocks
were being hammered. DHFL which is considered to a blue chip NBFC stock suddenly
saw its stock price decline by 60% in one day! The same was the case with IL&FS which
is supposed to be a stalwart in this field. The main reasons behind the decline of the Non-
Banking Financial Companies (NBFCs) stocks are as follows:
Conclusion:
The Reserve Bank of India (RBI) has taken some steps to prevent the conversion of this
Non-Banking Financial Companies (NBFCs) crisis into a full-fledged financial crisis. The
RBI has changed its rules in order to make it easier for Non-Banking Financial Companies
(NBFCs) to obtain capital. Banks were earlier restricted in the number of loans they could
make to NBFCs. Banks were earlier allowed to lend a maximum of 10% of their loans to
NBFCs. This limit has been temporarily raised to 15% for a few months. The immediate
effect of this step has been to release close to $10 billion worth of liquidity to the cash-
starved NBFC sector. RBI’s decision will help Non-Banking Financial Companies
(NBFCs) to raise cash in the short term and roll over their debts. The fear of defaults will
be quelled for the time being.