Government to bail out Private NBFCs - A tricky call!

In the last few months, there have been calls from various market participants for the government to intervene and sort out the DHFL mess. It may be recalled that problems at DHFL started when IL&FS began to default in the middle of 2018 and eventually led to collapse of share price once bond yields spiked to levels indicating real possibility of a default. Similarly, there have been many NBFCs who have requested temporary relief packages to be able to stay floated despite FM Nirmala announcing many measures.

DHFL before the collapse was one of the fastest growing housing companies and even now, it does represent a major systemic risk. It has total loans and bonds in excess of 100,000 crore including banks, insurance companies, provident funds and even retail investors. There are builder clients of DHFL but they will benefit when the real estate completion package is worked out. But that may not really warrant government intervention at this point of time. Like in the IL&FS case, the government wants to find a resolution rather than bailing out DHFL. Though its an established fact that late action is equivalent to no action.

The bigger concern for the government is that of a moral hazard. For starters, if the government intervenes to rescue one NBFC at this point of time, it may have to do the same for many more such future cases. Secondly, the problems at many NBFCs (like DHFL, HDIL, SREINFRA etc) appear to be a mix of bad business decisions and willful fraud. The first priority of the government would be to use the regulation authorities - ED, the SFIO and forensic teams to determine the extent of money that has been lost or siphoned out. Unless there is clarity on this front, the government would not be too keen on bailing out as such practice is tantamount to an incentive to perpetuate such unethical business practices in future. The best option still remaining is to monetize the assets of the company, repay the stake holders in a proportionate manner and take strict action against erring promoters!

The author may have positions in the stocks as mentioned in the article above, please assume us to be biased. This is not a recommendation to buy or sell securities. This is purely information about the company mentioned. Equity investing contain risks and please consult your financial adviser for any buy and sell securities!


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