Srei’s fall and the sorrysaga of shadow lenders

What is the news?

After the 2018 collapse of IL&FS and 2019 collapse of DHFL, the Reserve Bank of India (RBI) has added the Kolkata-based Srei Group to the country’s list of failed non-bank lenders.

The regulator superseded the boards of two non-banking financial companies (NBFCs), Srei Infrastructure Finance Ltd and Srei Equipment Finance Ltd.

To manage them, RBI appointed an administrator, under whose charge it would like their insolvency to be resolved through India’s bankruptcy code, for which it has sought approval from the National Company Law Tribunal (NCLT).

Why RBI took this step?

RBI has cited governance concerns and defaults, for its latest decision.

As the effects of an economic slowdown after 2017-18 began to impact our financial system, several loans were bound to go bad and expose vulnerabilities that had stayed hidden. The collapse of infra-lender IL&FS impacted Srei too. Then the COVID struck, and project disruptions added to its problems. Presently, Srei owes about ₹30,000 crore to banks alone and then there are bond-holders too.

Moreover, as seen in earlier cases, a lender’s collapse could have a domino impact on the finances of others, which in turn can destabilize credit markets. 

Hence, a pre-emptive call has been made by RBI to yield an acceptable outcome in this case as with DHFL, which faced similar action, and was eventually acquired by the Piramal Group.

What are the reasons behind the NBFC crisis in India?

At the core of our NBFC crisis has been a big mismatch in borrowing and lending tenures, with short-term funds deployed for longer-term loans.

Now that RBI has NBFCs under watch to a greater extent than before, assets and liabilities should not be allowed to get so badly misaligned again. Nor, for that matter, should favours be extended in the guise of loans.

Source: This post is based on the article “Srei’s fall and the sorrysaga of shadow lenders” published in Livemint on 6th Oct 2021.