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Home STOCKS Financial debt cash fiasco: From IL&FS crisis to Templeton fiasco, how &...

Financial debt cash fiasco: From IL&FS crisis to Templeton fiasco, how & why the financial debt market unfolded

By Deepthi Mary Mathew
Indian credit card debt market has experienced a tough ride for a number of a long time now. The slowdown in the domestic financial state and the liquidity disaster subsequent the IL&FS fiasco had bruised the personal debt market sufficiently in the pre-Covid months. And then the lockdown and other limitations next the outbreak of the pandemic only accentuated the problem.
In a latest episode, Franklin Templeton Mutual Fund wound up six debt mutual fund strategies. The fund home cited high redemption strain and absence of liquidity in the bond market as a most important causes for the determination.
Liquidity crunch and risk aversion have been main troubles plaguing the monetary sector for some time now. In the present-day state of affairs, there is a inclination amid the traders to dump dangerous assets and change to safe and sound havens amid an uncertain economic outlook. This has, in switch, led to amplified redemption strain in the debt market that fuelled the liquidity crunch. Though RBI has announced several measures to make sure liquidity in the market, its usefulness looks to be restricted.
RBI announced Particular Liquidity Facility worthy of of Rs 50,000 crore for mutual cash. Equally, the central bank has also executed Targeted Lengthy-Term Repo Procedure (TLTRO) with a related objective.
Risk aversion was dominant in the financial system, and it bought even further heightened in the latest crisis. For instance, the asset high-quality evaluation (AQR) initiated by RBI in 2015 created the banking institutions risk averse as they were being in a hurry to clean up up balance sheets. The IL&FS and DHFL crises that ensued created the condition even worse, as financial institutions became additional cautious in lending.
The economic slowdown coupled with risk aversion created it hard for bond issuers to elevate dollars from the financial debt market. The NBFC sector was the worst influenced, as they generally depend on issuance of commercial papers to meet credit necessities. However, the IL&FS episode restricted NBFCs borrowing from the debt market, as mutual resources limited their exposure to NBFC securities.
Consequently, numerous sectors this sort of as genuine estate faced big liquidity crunch, as they relied mainly on NBFCs for money. It desires to be highlighted that the collapse of IL&FS was linked to a structural issue in the financial state, as it was the result of a delay in the commencement of various initiatives thanks to concerns involving land acquisition. And that disaster played a main role in generating the risk- aversion, which resulted in the debt market crisis.
In the current situation, business things to do are staying strike badly thanks to the Covid-19 pandemic. It produces an uncertain predicament on no matter if bond issuers will be equipped to fulfil their obligations. The measures declared by RBI and the authorities only helped make customers for top-rated papers. But there are no takers for the low-rated types even at larger yields, as the risk appetite of investors weakened.
Financial debt resources that invested in these low-rated papers are in a tough spot, as the investors are dashing for redemption. Likewise, the NBFC sector is cash-strapped with minimal access to funds contrary to banking institutions. Consequently, with restricted liquidity in the NBFC sector, there are probabilities that NBFCs would delay or default on payments on securities held by debt mutual resources.
These developments underline the simple fact that more steps are want to strengthen the corporate bond market in India. In spite of a variety of initiatives, the functionality of the credit card debt market has not been up to the envisioned stage. Problems this kind of as high cost of borrowing and inadequate liquidity keep on to canine this section. It needs extra actions from the regulators as a robust and nutritious debt market is important to satisfy credit requirements of enterprise and business in a increasing economy.

(Deepthi Mary Mathew is an Economist with Geojit Money Solutions. Sights are her have)


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