Department of Economic Affairs (DEA) fears significant default from large non-banking finance companies (NBFC) and housing finance companies in the next six weeks if no additional liquidity support is provided to these firms, MoneyControl said on Friday.
The DEA, in a letter to the Ministry of Corporate Affairs, described the financial situation as “still fragile” when discussing the financial stability impact of the Infrastructure Leasing and Financial Service Ltd’s (IL&FS) default, the website said.
A string of defaults at IL&FS have triggered sharp falls in Indian stock and debt markets amid fears of contagion within the rest of the country’s financial sector.
Last month, the government took control of IL&FS to protect the financial system and markets from potential collapse, and replaced its board. The new board submitted a plan to revive the debt-laden firm this week.
Nearly 2 trillion rupees ($27.23 billion) of NBFC and HFC debt is due for redemption by the end of December, the DEA said in its letter. It said it estimates a funding gap of as much as 1 trillion rupees by the end of the year.
The DEA declined to comment on the matter.
A further 2.7 trillion rupees of commercial paper and non-convertible debentures will be due for redemption over Jan-March next year, the report added, citing the letter.
Without additional liquidity support a significant default from the largest NBFC and HFC could occur within six weeks and the financial cycle of the productive sector would be adversely affected, the report said, citing the DEA letter.
The report on the letter comes amid a growing spat between the government and the Reserve Bank of India (RBI), with one of the disputes being over government pressure on the central bank to boost liquidity to NBFCs.