The group’s non-banking finance company (NBFC) arm in India was to be called Sharekhan BNP Paribas Financial Services
French banking group BNP Paribas' NBFC plans in India may have fallen prey to the present crisis ailing the industry.
BNP Paribas, which acquired Sharekhan broking house in 2016, was looking to expand its lending business through the latter's non-banking finance company.
The company even secured a license for starting the NBFC and hired over 100 employees. The NBFC arm was to be called Sharekhan BNP Paribas Financial Services and was set to be launched in December.
But tables turned after the liquidity crisis hit the NBFC sector triggered by IL&FS default. The French banking group, according to three industry sources, has not just deferred the launch but is also looking to sell its NBFC license.
And if the market grapevine is to be believed, BNP Paribas has been unable to find a buyer and may end up surrendering the NBFC license.
The setback is symbolic of the larger crisis of confidence in the NBFC industry. The IL&FS default had triggered a mini-collapse in the market, and credibility of rating agencies took a beating.
Sharekhan BNP Paribas, however, said it is not surrendering the NBFC licence, responding to a query sent by Moneycontrol.
"We are constantly exploring new solutions that will deliver benefits to our Sharekhan clients as part of our ongoing sustainable commitment to the Indian market. New products and services are only launched when we believe they are in the best interests of our clients and may be supported sustainably over time by our Group," the company said in its response.
The acquisition, and the trouble
Sharekhan Financial Services was a wholly-owned finance company of broking firm Sharekhan acquired by BNP two years ago. Sharekhan Financial offers margin funding, loan against shares and ESOP funding to clients and rich individuals.
After BNP acquired Sharekhan, the French bank group wanted to tap Sharekhan’s network and expand the lending business.
But the plan soured when the first signs of trouble in the Infrastructure Leasing & Financial Services (IL&FS) group emerged in June when it defaulted on inter-corporate deposits and commercial papers (borrowings) worth around Rs 450 crore. Over the next 2-3 months, at least two rating agencies downgraded the company's long-term credit rating.
IL&FS Financial Services defaulted on seven debt obligations in September. In all, the IL&FS group owed over Rs 91,000 crore.
Somewhere down the road, NBFCs started getting compared with IL&FS, and their financials were put under deep scanners.
A few debt fund managers started abandoning NBFC papers in panic and rumours started flying thick and fast about NBFC facing default prospects.
As of January-end, the 43-player mutual fund industry managed Rs 6.3 lakh crore of fixed income assets compared to 13.73 lakh crore in September. MFs held Rs 2,700 crore worth of IL&FS bonds and debt papers.
The market was concerned that the bonds issued by other IL&FS subsidiaries like IL&FS Transportation, IL&FS Tamilnadu Power, IL&FS Energy Development and IL&FS Security Services could be downgraded in the near future.
On September 10, rating agencies ICRA and CARE downgraded non-convertible debentures of IL&FS to BB from AA+. ICRA and said the downgrade reflected "rising pressure on liquidity at the group level due to sizeable repayment obligations".
ICRA also downgraded the short-term rating for a Rs 4,000 crore commercial paper programme of IL&FS Financial Services, a subsidiary of IL&FS, to 'A4' from 'A1+'.
IL&FS Financial had informed exchanges the company would not be able to issue any commercial papers until February 28, as it had defaulted on payments on two papers, which were due to mature on August 28 and August 30.
NBFCs funded developers by raising capital from banks and mutual funds. After defaults by IL&FS and the alarming sale of Rs 300 crore worth DHFL commercial papers at higher yields by DSP Mutual Fund, markets became wary of a possible NPA crisis in NBFCs as well.
Banks reacted by tightening lending to NBFCs which in turn squeezed the lending capacity of NBFCs and therefore, impacted capital flow.
One of the fallout of the crisis is now BNP Paribas' NBFC dream.Note: This article has been updated to incorporate the company's response