{"id":32613,"date":"2018-10-29T15:37:39","date_gmt":"2018-10-29T10:07:39","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=32613"},"modified":"2018-10-29T15:37:39","modified_gmt":"2018-10-29T10:07:39","slug":"what-is-the-market-instrument-at-core-of-ilfs-woes","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/what-is-the-market-instrument-at-core-of-ilfs-woes\/","title":{"rendered":"What is the market instrument at core of IL&FS woes?"},"content":{"rendered":"

What is the market instrument at core of IL&FS woes?<\/strong><\/a><\/p>\n

News\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong><\/p>\n

    \n
  1. Non-Banking Financial Companies (NBFCs) are facing capital crunch in the wake of IL&FS defaulting on its commercial papers.<\/li>\n<\/ol>\n

    Important Facts:<\/strong><\/p>\n

      \n
    1. What is Commercial Paper?<\/strong><\/li>\n<\/ol>\n

      Commercial Paper is an unsecured money market instrument issued in the form of promissory note.<\/p>\n

      CPs are short-term instruments<\/strong> and the maturity period varies from seven days to up to one year.<\/p>\n

        \n
      1. Purpose of CPs<\/strong><\/li>\n<\/ol>\n

        The instrument was introduced in 1990 to enable highly rated corporate borrowers to diversify their sources of short-term borrowings<\/strong>, and also to provide an additional instrument to investors.<\/p>\n

          \n
        1. Who can issue CP?<\/strong><\/li>\n<\/ol>\n

          CPs can be issued by corporates, primary dealers, and financial institutions.<\/p>\n

          Eligible participants should have a minimum credit rating of A-2 at the time of the issuance of the CP. Banking companies, mutual funds, other corporate bodies, NRIs, individuals and foreign institutional investors (FIIs) can subscribe to CPs; they are also traded in the secondary market.<\/p>\n

          About IL&FS crisis<\/strong><\/p>\n

            \n
          1. IL&FS, a giant government-owned conglomerate that has executed, or is in the process of executing, some of the largest infrastructure projects in the country, is started to default on its commercial papers.<\/li>\n
          2. Credit rating agencies has downgraded IL&FS and its subsidiary ratings from high investment grade (AA plus and A1 plus) to junk status, indicating actual or imminent default.<\/li>\n
          3. This has led to panic in the debt market, and a drying up of liquidity in the system \u2014 and NBFCs and housing finance companies (HFCs) started to find it tough to carry out their normal businesses.<\/li>\n<\/ol>\n

            Effects of the default by IL&FS<\/strong><\/p>\n

              \n
            1. Default by a big corporation like IL&FS is likely to keep away potential investors in debt instruments of Housing Finance companies (HFCs) and Non-Banking Finance Companies (NBFCs).<\/li>\n
            2. Sharp losses in NBFC stocks have triggered a vicious cycle \u2014 losses in leveraged positions are leading to selling in other stocks to cover those losses, which is in turn fuelling further losses in the market.<\/li>\n<\/ol>\n

              What IL&FS do?<\/strong><\/p>\n

                \n
              1. IL&Fs raises funds for long-term projects.<\/li>\n
              2. While IL&FS needed funds for 10-15 years for execution of long-gestation projects, it usually raised funds for 8-10 years, and then got the project refinanced.<\/li>\n
              3. However, some three years back, when banks stopped refinancing and funding infrastructure projects, IL&FS was caught in a situation where it needed funds on an immediate basis in order to complete projects that were in various stages of execution.<\/li>\n
              4. It was then that IL&FS started looking at other sources of finance, including Commercial Papers (CP) and debenture issuances.<\/li>\n<\/ol>\n

                How IL&FS caught in a situation of asset-liability mismatch?<\/strong><\/p>\n

                  \n
                1. This led to IL&FS being caught in a situation of a big asset-liability mismatch<\/strong>, as it was using short-term funding instruments to finance long-term infrastructure projects.<\/li>\n
                2. With a huge requirement of funds but no availability, IL&FS reached a situation in which it could no longer honour its obligations, and started defaulting on commercial papers.<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

                  What is the market instrument at core of IL&FS woes? News\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Non-Banking Financial Companies (NBFCs) are facing capital crunch in the wake of IL&FS defaulting on its commercial papers. Important Facts: What is Commercial Paper? Commercial Paper is an unsecured money market instrument issued in the form of promissory note. CPs are short-term instruments… Continue reading What is the market instrument at core of IL&FS woes?<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-32613","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704885350},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/32613","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=32613"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/32613\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=32613"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=32613"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=32613"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}