it is nearly 2 yrs now since ilfs and nbfc crisis first hit. yet number of casualties since ilfs on the nbfc side is just two- dhfl and adag group cos- this despite limited explicit support from govt & regulator, economy going further downhill in 2019 and then covid striking!

there is yes bank too on the financial sector overall, but that was a bank. but overall this has still been a surprise

this is both good and bad in a way. more on that later on the thread. But do you think such a scenario was possible in say US or other DM economies? we would have either had many entities collasping or govt stepping in big to bailout or both! Whats different here?

A large reason for this is the nature of the funding of these entities v/s how they are funded elswhere in the world Ultimately while the quality of the assets determines the long term surivival chances of any entity, in the short run , survival is a fn of the liability side

the initial ostensible problem when the ilfs/nbfc crisis hit was liqudity and ALM, somehting which attracted the maximum attention then. But once this problem was solved through some moral suasion , the immediate existential hurdle was crossed

for a financial sector entity, even if 50% of your book is junk , you can still survive for long enough with good liquidity if your liabilities are reaosnably spread out. simply by churning and selling the rest of the book if required.

Ofcourse, this is not as easy as it sounds. Effectively by doing that, you are endangering your ability to repay in future as you are left with increasingly worse assets. And in likes of developed markets, the long term debt holders wouldnt allow such a thing to happen

given that it is detrimential to their interests. Either through covenants/greater monitoring etc. But here since a lot of funding is through banks, and even the rest of the funding market isnt pro-active enough, this kind of thing can go on for quite long.

And thats indeed what happened to a great extent.

both good and bad in a way.

Good if you can help entities recover a& restart new credit cycle so that old problems fade in comparison.

Bad if undeserving entities survive as zombie firms and endanger stability again in future

to complicate things, covid has struck, complicating and blurring lines between the deserving and undeserving, between companies with otherwise good business models and bad, between companies with good corp governance, moderate governance , bad goevrnance and plain fraud

And in the absence of ability(?) or will (?) or both of both regulator (?) and govt to distinguish on the above, post Coivd, govt has also stepped in and tried to help with various schemes and improve liquidity

this has improved the staying power of many of these stressed.firms. even as for some other non-stressed ones, it is a vindication of their business model that even with a 50% drop in collections for a few months , they have managed to survive.

But the issue is atleast for the first set, they are only able to survive, but wont be able to grow anytime soon.

That isnt a bad outcome if we are able to start new credit cycle, develop alternate sources of overall credit while letting these entities either die or consolidate

but if we arent, then the remaining assets left with these entities will only keep getting worse. Any wholesale bailout of the sector also becomes very difficult to sell if remaining assets are shaky, dodgy or even fraud.meanwhile overall credit to the system will choke.