Unlike banks’ troubles, NBFC crisis will hurt all

The last few weeks and months have seen events unfolding in the fixed income markets evoking varying reactions from different stakeholders. While some of these events have been waiting to happen for a while, some of these reactions are surprising.

Sample some. “Slippages of banks over the last few years have been astronomical. The size of troubled exposure from mutual funds and NBFCs are negligible compared to that.” Another one: “MFs have redeemed multiple lakh crores of investor money ..

All of the above are irrefutable and true. However, this misses a very important difference. Who is the stakeholder bearing the pain?

In the case of slippages of banks, the numbers kept climbing and a majority of banks reported losses for multiple quarters/ years. There was no run on deposits on any bank and the system continued to function normally, albeit with a much lower risk appetite. This was because the entire pain was borne by the shareholders. The majority of the losses were fr ..

The current context is very different. The size of the stressed exposure with MFs and NBFCs are a fraction of the stressed exposures the banks have had to recognise and resolve. But the hue and cry from the media, public and other observers are as shrill, and possibly more, than what the banks had to contend with. This is logical too, considering who is bearing the pain this time around. It is the individual investor, the unsophisticated common man on the street. These individuals are not the pu ..

The idea of stating the above is not to play the blame game but understand the basic issue the system is grappling with today and chart the best way forward. Though it is early days, we have made reasonable progress in ‘financialisation’ of savings and these events should not undo the good work done till date. Trust in the system as a whole should not erode, even as players can go through their own catharsis. For this, it is important to isolate the troubled entities and exposures and proactivel ..