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There is a dire need to develop and deepen the debt market, says the MD of Sundaram Finance
Rates may have eased in the shorter-end with the Reserve Bank of India (RBI) relaxing the SLR (statutory liquidity ratio) norms but liquidity, especially in the longer-end, is a challenge, according to T.T. Srinivasaraghavan, managing director, Sundaram Finance Ltd. “Shorter end rates have cooled but in the longer end, rates are theoretical. Nobody is willing to lend long term. Liquidity has been tight for the last one year. Even with our “AAA” rating, money has become dearer and dearer over the last 12 months… and the situation has only aggravated in the last few weeks,” said Mr. Srinivasaraghavan.
“No one is even talking long-term (three years). No one is willing to lend long-term in the current scenario. At the moment, their lending horizon is 30 days and 90 days,” he added. In his view, the IL&FS (Infrastructure Leasing and Financial Services) imbroglio “is probably the culmination of something that we have been talking about for years — lack of depth in the debt market and the absence of long-term funding.” The current crisis, he said, had brought that reality to the surface.
“Previously these challenges were just mentioned in [the] passing, and the belief was that somehow one would manage. When you look at any long-term lending in the country, say 10 to 15 years, there are no matching sources on the liability side,” he said. In this context, he pointed to the housing finance industry where the typical period of a loan was 20 years. “The maximum period of funding that an housing finance company gets is around seven years. Variable rate loans cover the interest rate risk. What about the liquidity risk? When the shorter-term liabilities mature, one has to fill that gap. When the going was good, there was further funding after the initial term of funding [had] expired. And, this way it is rolled over for 20 years,” he said.
‘The chain snaps’
“Thus, it has gone on smoothly in the past. But in a situation where confidence is eroded and the funding dries up after the first term, what happens? The chain snaps,” he said. He said that there was a dire need to develop and deepen the debt market.
“This is a country that is hungry for infrastructure investment. They (the government) have to create through innovative tax structures, incentives and other modes … to make it attractive for people to come in with longer-term money,” he said. The future growth of the country’s economy is predicated hugely on infrastructure and housing. From the point of view job creation and affordable housing for all , these were the two big pillars. “There has to a strong base resource for these two sectors. One little sneeze can choke the market, as there is no depth. For how long can we go on with just the short-term funding and asset-liability mismatch?’’ he asked. He lamented the lack of a broader understanding of the different elements of NBFC in the market. “NBFCs are so unbelievably heterogeneous. It is not something new. We have been saying this for years. There needs to be a more nuanced understanding of NBFCS based on their assets and risk profile. A one shoe fits all approach will not work,’’ he added.
Source : https://www.thehindu.com/todays-paper/tp-business/liquidity-remains-a-critical-challenge/article25076012.ece
