The ongoing earnings season is likely to spring some surprises, given that the September-December 2018 quarter was a rare, tumultuous period for India Inc and a challenging phase for the economy as well. For the same reason, this time, not just companies, but the government also has to keep a close watch on the corporate numbers to figure out what the figures are revealing about sector specific dynamics. The third quarter had a mix of events that had not been witnessed in recent years. Crude oil prices saw the biggest fluctuation during the quarter, starting from a high and falling below $50 a barrel by end of December.

IL&FS, which was assumed, though wrongly, to be a government-owned institution, went belly up, turning its AAA-rated debt instruments into almost worthless pieces of paper overnight. The mid-September crisis unleashed by the finance company made liquidity scarce for companies and lending institutions, especially for shadow bankers. Policy makers have to assess the impact of this short-term liquidity crisis on the non-banking finance companies (NBFCs) and their borrowers. Sectors like automobiles, where sales are largely credit driven, would certainly have suffered from the sudden drying up of liquidity, but the extent of damage had to be assessed and recorded for future policy decisions. Based on the assessment, suitable guidelines may have to be given to NBFC sector. The current set of guidelines spruced up for better regulation, as the liquidity scarcity had come out of the blue to a sector that was riding a phase of easy liquidity and low rates. Until the IL&FS crisis surfaced, no liquidity issue or asset-liability mismatches were reported from the sector. This is perplexing and points either to slackness in regulation or the need for tighter guidelines.

Sprucing up regulation is critical at a time when fintech companies are playing a crucial role in evolving the credit infrastructure in the country. As more number of players join in and new technological possibilities emerge, as well as more geographies come under their ambit (for example spread to tier-III and tier-IV cities and towns) that would change the dynamics of the financial services space to a meaningful extent. The problem with the financial sector is that while growth is rapid, any trouble in the sector moves from one segment to another in an equally rapid fashion. For instance, the trigger for panic over the IL&FS issue was selling of just a few hundred crores worth of debt paper by a mutual fund house at a yield of 11 per cent. So, the crisis unraveled in space had to be taken as an opportunity to identify systemic risks and frame suitable policies.

Policy makers need to focus on speedy resolution of the IL&FS issue and markets need to be informed about the progress in resolution. Lack of communication may lead to a situation where markets face avoidable chaos. Just a few days before the earnings season was to start, there were reports that Reserve Bank of India had refused to give banks special permission on their exposure with IL&FS. It was expected that from the denial of permissions, banks with exposure to IL&FS would be making massive provisions in their profit & loss books. But, as the results season started, IndusInd Bank made provisions that were equivalent to what it had made in the earlier quarter. If the RBI doesn’t spell out its stance, all the issues that are being swept under the carpet will come out in one fell swoop. That dirt will bring its own set of problems with once again PSU banks carrying the can.