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Recent Drought in Indian Lending Space – Have corrective measures been taken ?

The current slowdown in the economy largely fueled by decline in credit off take to auto, real estate & other sectors is gradually leading to unemployment & decline in GDP growth rates.

The essence of all human activity & inter-relationship is “Mutual Trust”. Where there is no trust between humans, even the best of technologies & legal systems are rendered ineffective.

The IL&FS fraud, one of the biggest in Indian Financial sector, followed by the DHFL default, has shaken the “Mutual Trust” in the system that various intermediaries had between themselves. So far so, banks & Mutual Funds are unwilling to lend credit to NBFCs & are sitting on idle cash.

The supply of money for Commercial Paper & other instruments of raising money used by NBFCs have dried up. Not long ago did India witness a drought like situation in its agriculture sector, which largely impacted farmers keeping those living in metros unaffected & untouched, that this “Financial Drought” has come to effect the ones who have & stand to gain by India’s economic development.

It is no brainer that unethical practices by audit firms, lack of regulatory enforcement by government, willfully incorrect ratings by credit rating agencies & of course, a collusion of the Board & the management led to the billion dollars default & fraud.

For how long can man run away from oneself, one day he has to face up & bear up the consequences of the seed he as sown. The poisonous fruit that this tree of IL&FS has given is now ready for all of us to consume.

In today’s times, when Japan, EU & America are struggling to create new economic opportunities in their own land & are looking up to India as one place where they can multiply & sustain their wealth, willful & collusive systemic frauds by the Indian system such as these create an atmosphere of mistrust & lack of faith in the country.

Citizens of a country dare to take the system for a ride when they are confident of getting away free by gaming the legal system through money & political muscle.

The challenge now faced by the current government is how to get the cycle started again. While the Budget announcement to provide guarantee to Rs 1 lakh crore of high-quality asset purchase by PSBs from NBFCs is a starter, much more needs to be done to get the cycle running fast & steadily.

NBFCs have been the major source of funds to real estate sector, which need funds typically for longer duration, in the range of 5-10 years. On the other hand, the money raised by NBFCs is short term credit (STC). Till now, the cycle was sustained by a credit roll over happening in the short-term money market.

An “Asset Liability Mismatch”, which already existed but was ignored, has now come to haunt us all. The solution to this problem is need of having foreign owned long term funds to be invested in the country, which is provided by pension funds, sovereign funds, insurance funds etc.

However, to tap these institutional sources, India needs to have robust systemic processes which promote good practices & punish those who try to take system for a ride. The cost of illegal practice has to be very high for it to dissuade people from taking it up as the way of doing business.

An Asset Quality Review of the NBFCs as was done in case of banks could be one way forward to develop trust in the system. But more importantly, “Stricter Laws & their Speedy Implementation” is the need of the hour for such instances not to repeat in future & to keep the unethical animal spirits of its citizens in check.

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