NBFC crisis: It’s a solvency issue manifest as liquidity crisis, says CEA Krishnamurthy Subramanian
The Financial Express: Banikinkar Pattanayak: May 10, 2019
Amid mounting fears that more non-banking financial companies (NBFCs) may default like IL&FS due to a growing liquidity crunch, chief economic advisor (CEA) in the finance ministry Krishnamurthy Subramanian said on Thursday that the issue is actually one of solvency of a very few players. So the asset-liability mismatch of firms in the entire shadow-banking space needs to be “very tightly and carefully monitored” to ensure the crisis doesn’t recur or flare up, he added.
“Assets of some NBFCs are long-dated while liabilities are short-term. When the going gets tough, those NBFCs that are not solvent enough find it difficult to roll over (payment obligation). So what is typically a solvency issue appears to have been a liquidity issue,” Subramanian told FE in an interview.
Amid a controversy over the GDP data and its source (The latest NSSO report suggested that over a third companies in the MCA21 database that is used for the computation of national income seem to be dodgy), Subramanian said the economy will likely grow at 7%-plus in the current fiscal, against the estimated 7% for FY19. While structural reforms like GST and IBC have already been undertaken, the next round of reform has to be in the capital and labour markets, he added.
The CEA asserted that the onus of ensuring the quality of ratings lies solely with the rating agencies; they can’t just crib that companies didn’t provide enough information to them to be able to discharge their duty efficiently.
Similarly, auditors, being the first line of information intermediaries, can’t complain they couldn’t detect irregularities early because they went by what the company’s management told them. Also, they must not be self-regulated, so the National Financial Reporting Authority (NFRA) has to be strengthened. Even some of the developed countries like the US were forced to shun self-regulation after the Enron scandal in 2001, he added.
Subramanian prescribed the option of a seven-day default rule for lenders if the one-day default rule is too difficult to be implemented. However, such strict default-reporting mechanisms are essential, he viewed.
Commenting on some of the mutual funds delaying full redemption for investors due to a delay in recovery of their funds lent to NBFCs, the CEA said investors need to be made aware of risks. “If they have invested in a mutual fund, they have to be made aware of the fact that such investments are not like fixed deposit and, therefore, carry a certain amount of risk.” Kotak Mahindra AMC is learnt to have informed investors recently that it might not be able to redeem the entire amounts in multiple schemes, while HDFC AMC has rolled over one of its schemes by some 380 days.
As for shoddy auditing, from Satyam to the Nirav Modi fraud, auditors’ role has been questioned by probe agencies and in many cases they have been found to have been either lax in doing their duty or complicit in financial bungling. Recently, the Serious Fraud Investigation Office has found that Deloitte Haskins & Sells did not exercise adequate due diligence while auditing the books of IL&FS Financial Services.
However, hardly anyone has been punished in proportionate to their crime, thanks to self-regulation. After leaving the auditors’ body ICAI to regulate auditors for decades, the government decided to set up NFRA in 2017.
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