Background:

Managing a heavy (almost one-fifth) credit of the country, the Non-Banking Financial Sector was
a Vital Sector for an economy, as NBFCs had a better credit growth rate than Banks ​(Exhibit 4).
A series of bad news and problems were hurting the Indian NBFC Sector, since the default of
Infrastructure Development Finance Major IL&FS in September, 2018. Even if someone did not
follow the news relating to the NBFC sector, the degree of Market Reaction must have got the
attention and also triggered intense reactions in the Capital Market. This also helps a person to
see how this crisis impacts the Corporate Sector in general and also the personal finance
through its effects on Portfolio Investments.

The recent effect on the share price performance of some of the NBFCs are given in Exhibit 5.
The Exhibit shows the computed most recent I week, 1 month, 3 months, 6 months raw returns
of NBFCs and Housing Finance Companies (HFCs). As evident from the Exhibit, most of the
HFCs stocks were trading at about half of the price, as compared to 3 to 6 months back. The fall
in the share prices have been even sharper for two of the IL&FS group affiliated companies-
IL&FS Transportation Services Networks and IL&FS Investment Managers, and the Dewan
Housing Finance Ltd. (DHFL), all of which had almost lost their 75% of their market valuation in
the market valuation during almost the last 6 months, and these companies were the epicentre
of the recent NBFC crisis.

The series of defaults led the investors to panic and react the way stocks charts earlier
indicated. Market interpreted these announcements as signals of Financial Distress in the NBFC
sector. As a result most of the NBFC stock came under severe selling pressure, this led the
Investors to increase their risk aversion for Portfolio exposure to these NBFC securities, and
revised their valuation expectations downwards.

These Financing Institutions must ensure that the average borrowing rate (cost of funding) must
be below the average lending rate. This Interest rate spread is often measured by Net Interest
Margin (NIM), which is defined as income earned on assets minus interest expense incurred on
liabilities, divided by the interest-earning assets and this is also a most important valuation
driver of Financial Institutions Valuation. If NIM will be negative, this will be the result of
Asset-Liability Mismatch which today is the problem of most of the NBFCs. The IL&FS crisis is
also the of-shoot of Asset-Liability Mismatch as most of the Long-term assets were funded
through short-term financing. As a result, most of the deposits and liabilities in the short-term
brackets far exceeded the repayments to be received from the loans in the same brackets.

Hence when the subsidiaries of IL&FS Group announced the series of default happened on
their short-term payment obligations, the market participants interpreted this news as a signal of
impending financial distress for NBFCs and immediately became more risk averse in terms of
portfolio exposure to both debt as well as equity securities issued by NBFCs. This increased risk
aversion effectively meant that investors now willing to pay lower prices for the same NBFCs
securities than their prevailing prices, thereby increased both the short-term interest rates in the
money market and, the cost of funds of NBFCs and adversely affected the NIM and profitability
of NBFCs, as well as the valuations.

Exhibit 1 Rating History of last 3 years:

Source: CARE Ratings

Exhibit 2 IL&FS Auditing Firms and Dates:

Source: Live Mint

Exhibit 3 Structure of IL&FS:

Source:​ ​www.ilfsindia.com

Exhibit 4 NBFCs had better Growth rate than Banks:

Year Bank NBFC

Credit Credit
Growth Growth
Rate Rate (%)

(%)
 2014 14 14.8

2015 9.1 17.7

2016 10.1 9.7

2017 8.2 10.5

2018 10 19.6
Source: Economic Times

Exhibit 5 Share Price Performance of NBFC as on October 25, 2018:

Exhibit 6

Background:

Managing a heavy (almost one-fifth) credit of the country, Non-Banking Financial Sector was a
Vital Sector for an economy, as NBFCs had a better credit growth rate than Banks ​(Exhibit 4).
A series of bad news and problems were hurting the Indian NBFC Sector, since the default of
Infrastructure Development Finance Major IL&FS in September, 2018. Even if someone did not
follow the news relating to NBFC sector, the degree of Market Reaction must have got the
attention and also triggered intense reactions in the Capital Market. This also help a person to
see how this crisis impact the Corporate Sector in general and also the personal finance
through its effects on Portfolio Investments.

The recent effect on the share price performance of some of the NBFCs are given in the ​Exhibit
5. ​The Exhibit shows the computed most recent I week, 1 month, 3 months, 6 months raw
returns of NBFCs and Housing Finance Companies (HFCs). As evident from the Exhibit, most of
the HFCs stocks were trading at about half of the price, as compared to 3 to 6 months back.
The fall in the share prices have been the even sharper for two of the IL&FS group affiliated
companies- IL&FS Transportation Services Networks and IL&FS Investment Managers, and the
Dewan Housing Finance Ltd. (DHFL), all of which had almost lost their 75% of their market
valuation in the market valuation during almost last 6 months, and these companies were the
epicentre of the recent NBFC crisis.
The series of defaults led the investors to panic and react the way stocks charts earlier
indicated. Market interpreted these announcements as signals of Financial Distress in the NBFC
sector. As a result most of the NBFC stock came under severe selling pressure, this led the
Investors to increase their risk aversion for Portfolio exposure to these NBFC securities, and
revised their valuation expectations downwards.

These Financing Institutions must ensure that average borrowing rate (cost of funding) must be
below the average lending rate. This Interest rate spread often measured by Net Interest Margin
(NIM), which is defined as income earned on assets minus interest expense incurred on
liabilities, divided by the interest-earning assets and this is also a most important valuation
driver of Financial Institutions Valuation. If NIM will be negative, this will be the result of
Asset-Liability Mismatch which today is the problem of most of the NBFCs. The IL&FS crisis is
also the of-shoot of Asset-Liability Mismatch as most of the Long-term assets were funded
through short-term financing. As a result, most of the deposits and liabilities in the short-term
brackets far exceeded the repayments to be received from the loans in the same brackets.

Hence when the subsidiaries of IL&FS Group announced the series of default happened on
their short-term payment obligations, the market participants interpreted this news as a signal of
impending financial distress for NBFCs and immediately became more risk averse in terms of
portfolio exposure to both debt as well as equity securities issued by NBFCs. This increased risk
aversion effectively meant that investors now willing to pay lower prices for the same NBFC’s
securities than their prevailing prices, thereby increased both the short-term interest rates in the
money market and, the cost of funds of NBFCs and adversely affected the NIM and profitability
of NBFCs, as well as the valuations.

Exhibit 1 Rating History of last 3 years:

Source: CARE Ratings

Exhibit 2 IL&FS Auditing Firms and Dates:

Source: Live Mint

Exhibit 3 Structure of IL&FS:

Source:​ ​www.ilfsindia.com
Exhibit 4 NBFCs had better Growth rate than Banks:

Year Bank NBFC

Credit Credit
Growth Growth
Rate Rate (%)

(%)

2014 14 14.8

2015 9.1 17.7

2016 10.1 9.7

2017 8.2 10.5

2018 10 19.6
Source: Economic Times

Exhibit 5 Share Price Performance of NBFC as on October 25, 2018:

Exhibit 6
Background:
Managing a heavy (almost one-fifth) credit of the country, Non-Banking Financial Sector was a
Vital Sector for an economy, as NBFCs had a better credit growth rate than Banks (Exhibit 4). A
series of bad news and problems were hurting the Indian NBFC Sector, since the default of
Infrastructure Development Finance Major IL&FS in September, 2018. Even if someone did not
follow the news relating to NBFC sector, the degree of Market Reaction must have got the
attention and also triggered intense reactions in the Capital Market. This also help a person to
see how this crisis impact the Corporate Sector in general and also the personal finance
through its effects on Portfolio Investments.
The recent effect on the share price performance of some of the NBFCs are given in the Exhibit
5. The Exhibit shows the computed most recent I week, 1 month, 3 months, 6 months raw
returns of NBFCs and Housing Finance Companies (HFCs). As evident from the Exhibit, most of
the HFCs stocks were trading at about half of the price, as compared to 3 to 6 months back.
The fall in the share prices have been the even sharper for two of the IL&FS group affiliated
companies- IL&FS Transportation Services Networks and IL&FS Investment Managers, and the
Dewan Housing Finance Ltd. (DHFL), all of which had almost lost their 75% of their market
valuation in the market valuation during almost last 6 months, and these companies were the
epicentre of the recent NBFC crisis.
The series of defaults led the investors to panic and react the way stocks charts earlier
indicated. Market interpreted these announcements as signals of Financial Distress in the NBFC
sector. As a result most of the NBFC stock came under severe selling pressure, this led the
Investors to increase their risk aversion for Portfolio exposure to these NBFC securities, and
revised their valuation expectations downwards.
These Financing Institutions must ensure that average borrowing rate (cost of funding) must be
below the average lending rate. This Interest rate spread often measured by Net Interest Margin
(NIM), which is defined as income earned on assets minus interest expense incurred on
liabilities, divided by the interest-earning assets and this is also a most important valuation
driver of Financial Institutions Valuation. If NIM will be negative, this will be the result of
Asset-Liability Mismatch which today is the problem of most of the NBFCs. The IL&FS crisis is
also the of-shoot of Asset-Liability Mismatch as most of the Long-term assets were funded
through short-term financing. As a result, most of the deposits and liabilities in the short-term
brackets far exceeded the repayments to be received from the loans in the same brackets.
Hence when the subsidiaries of IL&FS Group announced the series of default happened on
their short-term payment obligations, the market participants interpreted this news as a signal of
impending financial distress for NBFCs and immediately became more risk averse in terms of
portfolio exposure to both debt as well as equity securities issued by NBFCs. This increased risk
aversion effectively meant that investors now willing to pay lower prices for the same NBFC’s
securities than their prevailing prices, thereby increased both the short-term interest rates in the
money market and, the cost of funds of NBFCs and adversely affected the NIM and profitability
of NBFCs, as well as the valuations.

Exhibit 1 Rating History of last 3 years:

Source: CARE Ratings

Exhibit 2 IL&FS Auditing Firms and Dates:

Source: Live Mint

Exhibit 3 Structure of IL&FS:

Source: www.ilfsindia.com

Exhibit 4 NBFCs had better Growth rate than Banks:

Year Bank Credit Growth Rate (%) NBFC Credit Growth Rate (%)
2014 14 14.8
2015 9.1 17.7
2016 10.1 9.7
2017 8.2 10.5
2018 10 19.6
Source: Economic Times

Exhibit 5 Share Price Performance of NBFC as on October 25, 2018:

Exhibit 6