I am not sure if we are having a Nbfc crisis now. I know that some Nbfc are not able to raise money, but some are able to raise money at sub 9% p.a. if they want to raise more than Rs. 50 crores.

However, let me go back to a pet peeve. In 1993, Mr. R H Patil nudged us to take a “WDM” membership in NSE. Our cash flow or net worth would not permit us to be in the “big” category so we took the equities segment membership. Coming to think of it RBI has still not allowed the debt market to be even born. So 26 years later we are still talking about developing a debt market. If RBI has its way, we will never ever do it.

Is is difficult to do it? Well for the retail investor could we just not start with national savings certificate, gilt, kisan vikas patra and FMP? Would that not be good? I have not bought Nsc – national savings certificate – just because I have no clue about the paper we are getting. What if it is fake? I would rather stay away.

Now imagine if we had a robust debt market (like we have a robust equity market)…what would happen?

Companies like Dhfl will be able to borrow at say 12% pa and at the same time Cholamandalam could borrow at 8%pa. Same market, different investors with different risk-reward expectations. As simple as that. Money would be available to anybody and everybody – at a price. Will people invest in DHFL? I do not know, but somebody is buying Dhfl shares at Rs. 112, right? So just give us a clean market – the investor will decide where to invest.

Not having a secondary market helps RBI think that it controls the interest rates in the country. It also forces people to keep their money in suboptimal assets like savings account, liquid funds, debt funds, endowment plans, etc. Do you realize that endowment plans are just a regulator arbitrage? If you buy a gilt directly (which you can’t) on that interest you will pay Income tax. If you buy a pension plan, the plan will invest the amount in gilt, and you will pay no tax in the accumulation phase. On maturity about 2/3 of the amount accumulated would be tax free, however the 1/3rd will become a pension, and that pension will be taxable. However, if I structure it like a money back policy, and invest in GSec…I can get tax free returns. Same product, just regulations arbitrage. Makes no sense, but that is exactly how it operates. Now if we build a robust Gov securities debt fund market, slowly you could let companies issue debentures with short maturity. You could then allow big companies to issue bonds upto 5 year duration – including zcb.

Will the government allow this? No.

If I were an employee wondering where to invest Rs. 20L I will not even think twice. It will OBVIOUSLY go into my voluntary Provident fund..taxfree, government guaranteed, good rate of interest.

Uff…i have meandered…but I hope you got what I wanted.



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  1. It is not about what interest rates different NBFC are able to get the funds from the market. I seriously doubt their competency of running business. I know some NBFCs are borrowing from Ultra Short bonds maturing in 6 months time and disbursing home loan for 15 years. In IL&FS, you have very well qualified people and seems everyone lost track of what their business is and revenue generation. To be honest every tom, dick & harry opened NBFC business in the country due to tighter banking licenses and led to this crisis. 80% of the NBFCs are doldrums and you would see lot of mergers in coming times.

  2. In addition to what Krish said above, we need to look at the role of rating agencies on these debt papers. It goes from AAA to A- within weeks and we have DHFL and ILFS scenarios playing out. Its not the lack of debt market thats causing liquidity concerns but its the honesty of these business. Yes bank is another example, they have cheated their investors for many years by hiding NPAs and now they are in trouble.
    Debt markets are not an answer to issues arising out of fraud. In fact, the mutual fund houses dont manage to deduce frauds, on what basis would a retail investor buy papers from such companies even at 12%?
    Finally all these NBFCs are needing money only to rollover their maturing papers, not exactly growing their business with fresh money. To whose benefit does RBI need to ensure they get the money? May be the shareholders because stock prices would not fall so much.

  3. I completely agree with Subra on this, we need a robust debt market, frauds notwithstanding. The reason is simple – not every company is involved in fraud and we cannot let some bad apples destroy a market we really need. That is like throwing the baby out with the bath water. If the market thinks a particular NBFC is bad, then the stock price should be zero. But it is not. So, there are some people out there who might buy debt at a higher rate.

  4. Not only the comments of esteemed authors of the earlier comments are valid, even, there is a factual error in the article/post.
    Out of the accumulated fund of a Pension Plan, only 1/3rd is tax free as given as ‘commutation amount’ and the balance 2/3rd is per forced to buy an annuity/pension which, then, is taxable.

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