Who knows the, What reason can create next Market crisis from which country. The loss which will effect the Share holders, government and the Non Banking Financial Companies (NBFC) etc. Here is one reason which effected the Indian market, that is use of short term debt in long term financing and Why Short term Debt is risky to invest in Long Term Financing ?
Lets know about the company and the reason that effected the Indian market. Lets find out why,when the crisis is happen.
What is IL & FS
Infrastructure Leasing and Financial Services (IL & FS) is an Indian infrastructure development and finance company. The company operates more than 250 subsidiaries.
The company’s major shareholders are Life Insurance Corporation India, Mitsubishi (through Orix corporation Japan) , Abu Dhabi Investment authority and IL & FS Employees welfare trust etc.
Company was successful with many major projects in India and other countries. More over company has a few undertakings in various segments including Transportation, Area Development, e-Governance, Health Initiatives, Cluster Development, Finance, Power, Ports, Water and Waste Water, Urban Infrastructure, Environment, Education, and Tourism.
What is the crisis?
IL & FS started taking the short term debt and provides long term funding to projects . NBFCs ( Non Banking Financial Company ) will issue the short term debt to the IL & FS.
IL & FS have funded the project of govt. of India ,but due to some reasons the projects have been canceled . By which IL&FS has started defaulting to several commercial papers and repayment of loans to mutual fund houses, corporate’s and banks.
Due to which IL&FS was having huge outstanding debt of Rs 91,000 Crores out of which Rs 57,000 Crores are to Public Sector Banks
Credit rating agencies that is ICRA and CARE started downgrading the ratings due to these payment defaults.
Impact of the crisis
- Stocks of non-banking finance companies (NBFCs) have been
losing the value.
- There was Decrease in the market share price , which affected public shareholders.
- Rising borrowing costs – Will lead to a credit crunch in the sector and make it difficult for firms that aren’t well capitalized to survive
- Effect on the NBFCs will impact on the GDP of the India.
But the Indian government and RBI have bailed out the IL & FS. So the impact of the crisis will decreases. And to control the liquidity , borrowing costs etc.
Why Short term Debt is risky to invest in Long Term Financing ?
Where a company can have ups and downs in span of lifetime it can be any reason. One of the reason might be where using Short term Debt is risky to invest in Long Term Financing .
Where using short term Debt in long term investment , That is
- Company need to pay interest for the short term debt which is high.
- Profits will be return after long span of time , till that time interest will be huge amount.
- Most important is that is any hurdle or problem faced and stopped the long term project. Which might stop the future profit to cover the short term Debt. By which company may fall.
This major reasons Why Short term Debt is risky to invest in Long Term Financing ?
Using the short term debt in long term financing will be a risky a decision. Sometime it may shows the positive results , not all the time. As there was crisis on the IL & FS company. Where impact was huge on the Indian market, but controlled by the govt. of India.
If there is any decision regarding the using of short term debt on long term financing , make sure that there should be compulsory benefit/ profit.