Non Banking Fund Crisis- The NBFC Crisis of 2018

What was the NBFC crises all about?

Wrong matching of funds. NBFC’s raised money for an average time period of 3–5 years (typically banks and Mutual funds), while they lend money for an average tenue of 10–15 years. Now when the payment to lenders fell due, these Shadow banks were left emptyhanded.

Utilization of money-

There is a simple concept in finance relating to utilization of funds. All money that is raised for long term purpose, should be invested in long term assets. Simply because money to be repaid in long term should be invested in assets that are to be held for long term. Also, money raised on short term basis should be specifically used for short term purposes. For a NBFC, long term money includes bonds and debt while short term funds comprise of commercial papers.

The problem arises when there is a mismatch between source and utilization. In NBFC’s case it was short-term funds used for long term purposes.

Mechanism-

To ascertain whether, short term funds are used for long term purposes or not, we calculated the long-term money available with the company and compared it with the long-term application of funds. If the result was positive, it meant firm has idle long-term money which was applied towards short term purposes which is alright, but if the result was negative, it meant funds raised for short term purposes were used for long term purpose, a case of asset liability mismatch.

Results-

DHFL, as apparent by the downfall in stock price has been using its short-term funds for long term purposes. Though the percentage used is lesser than what it was in 2015 and 2016.

The Bajaj Twins are well placed when assessed on this parameter with the percentage comfortably placed in the positive.

Shriram City Union Finance is another NBFC which has pretty comfortable amount of Idle long-term money.

The surprising one here is Piramal Enterprises. The mismatch between Long term money and Long-term assets is unfavorable.