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India Credit : There will be no Bailout!

No, the govt is not going to rescue India's Non Banking Financial Company (NBFCs). If they have let ILFS, which had LIC and SBI as its parentage go under, there is zero chance of anyone else getting a bailout. Yes, rates will be cut. probably another 50-75 bps. With Draghi joining the cut wagon and Powell making promises today, India cannot escape. Liquidity too will be infused through swaps and OMOs. But there is a difference between a Liquidity squeeze and a Credit crunch. Credit markets are parched much like India's farmlands. Credit spreads have risen sharply for the few who are able to borrow.Merely increasing liquidity or cutting rates does not enhance credit or bring down lending rates.

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The powers that believe that these lenders enjoyed the upside and now should experience the downside. In India profits, are often confused and damned with Profiteering. Lots of solutions have been suggested. Creating SPVs like the Fed did in 2008 which would take on some of the weaker assets. Creating a Land Bank in to which realty assets could be sold. All these have one common feature - funding by the govt. And that is why they will not work.

The solution to the crisis is simple.The only one with ready cash today are the banks. They are not willing to lend to the NBFCs but are happy to cherry pick their assets - at a cost. The key thus is pricing. Every asset has a buyer but at a price. Much of the current crisis is due to the mis- pricing which demonetisation led liquidity created. This will have to be rectified. It will lead to a hole in many balance sheets but that is the cost of survival. Growth is not the focus now, consolidation is. Valuations and stock prices have and will continue to get more realistic. Banks are the best liability engines in India and NBFCs are adept at asset growth. Theirs is a natural marriage. An LVB - IndiaBulls kind of merger is exactly what the doctor ordered. Mergers within NBFCs are also likely. A major shakeout of the sector is on the cards. Many PE firms who entered the sector in the past couple of years have suddenly discovered that NBFC balance sheets have a liability side as well! The industry has to find its own solutions rather than going to the govt for a handout. This cleaning of the Augean Stables was overdue and I am sure it will only make the lenders stronger.

*Rajeev P. Pawar is the Group Head, Balance Sheet Management and Investment at Edelweiss Financial Services. An experienced India and Emerging Markets Treasury specialist he has set-up and run successful ALM and Trading desks in Singapore, Dubai and India. (The views expressed in all posts are his own personal views and do not represent the view, strategies or opinions of Edelweiss group)

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