It is nine months since Infrastructure Leasing & Financial Services (IL&FS) imploded. RBI has pumped in nearly Rs 3.6 lakh crore in liquidity since April 2018. Conversion of loans into tradeable securities or securitisation is at record highs. Non-banking finance companies (NBFCs) have sold assets worth at least Rs 1.3 lakh crore. Defaults by big borrowers are few and far between.Not just that. Some shadow banking lenders such as Mahindra Financial and Shriram Transport have raised more than a billion dollars in overseas debt. Some others have recovered from a slump and are posting record profits. Still, Anil Ambani, the chairman of a financial conglomerate, declares that the non-banking finance industry is in urgent need of a bailout package for survival.“The sector has gone into ICCU over the past eight months,” Ambani said in a recent interview with ET. “The contagion and its cascading effect on the economy are clearly visible. In ICCU, if you want to save the patient, what is needed is not paracetamol but full life support.”Nirmala Sitharaman, the 59-year-old economist from Jawaharlal Nehru University who has just taken charge of the finance ministry, has her job cut out. That is to pull up the economic growth rate, which has slumped to a five-year low. But she is starting her innings with a key player severely injured. It’s like Liverpool Football Club’s Jurgen Klopp going into a Champions League knock-out match without Mohammed Salah.“The new FM can incentivise banks to lend to private NBFCs,” said Raman Agarwal, chairman, Finance Industry Development Council, a representative body of NBFCs. “The issue of bank’s hesitation and increasing costs needs to be addressed. The situation is critical for small and medium-sized NBFCs, where banks play a big role in providing growth funds.”Ever since IL&FS defaulted, the entire industry is on the ropes. Mutual funds, a key lender to the segment but without reliably long-term funds, have frozen because of redemption pressures. So NBFCs, a key intermediary that lent to millions of small firms and individuals to buy cars and motorcycles, are unable to meet the demand. SMEs account for 8% of India’s GDP.That’s partly blamed for the collapse in sale of automobiles and cut in discretionary spending. Automobile sales fell 17% in April, the sharpest decline in almost 8 years, data from Society of Indian Automobile Manufacturers shows. Maruti Suzuki, the auto bellwether reported a 19.6% decline in sales; tractor sales by Mahindra & Mahindra, a key indicator to farm economy, were 14.7% less in the fourth quarter than a year ago.“Basic thing that the government can do is to ensure that growth capital is available to all deserving NBFCs,” said KV Srinivasan, founder of Profectus Capital, backed by private equity firm Actis. “This will create a positive ripple in the financial services sector. Auto sales, two-wheeler and SME have taken a hit because of liquidity squeeze in the past six-eight months.”A key demand of the industry has been that the RBI lend funds to NBFCs under an exclusive window by keeping their assets as collateral. This, the industry argues, would help them overcome the resistance of traditional lenders such as banks and mutual funds in lending to them.“Special window is like giving medicine to a sick patient,” said Piran Engineer, an analyst with Motilal Oswal. “Next time you would not want to fall sick. Prudent players will take a step back and look at their business model.”NBFCs are preserving liquidity and in the process are shrinking their balance sheets.“Investors and lenders are showing discomfort for NBFCs that have holes particularly due to related party transactions,” said Abizer Diwanji, national head, EY. “NBFCs, which have excess of 8 times leverage, haven’t been able to manage liquidity well.”Normal disbursement for Indiabulls Housing was Rs 12,000 crore to Rs 13,000 crore in a quarter. After the IL&FS crisis, Indiabulls reduced disbursements to Rs 3,000 crore in the December quarter and to Rs 7,000 crore in March.Margins are squeezed due to higher cost of funds and CP primary issuances going down. For instance, the share of CP percentage for Gruh Finance was 20-22%. It has fallen to 15%.Liquidity balance for NBFCs has gone up to 8-10% from 3-4% before the crisis. Long-term money is even more difficult.But is it liquidity that’s at the root of the inability of NBFCs to lend?The net banking system liquidity moved to a surplus in the week ended May 31 to more than Rs 2,000 crore, that is for the first time in more than three months. The average liquidity deficit in May was Rs 38,736 crore, down from Rs 72,014 crore a month before, data from CARE Ratings show. The average call rate at 5.89% in the week was lower than the repo rate of 6%.If the data is any indication, it is not the liquidity but something else which is holding back NBFCs.“The control and the regulations for NBFCs are made by the RBI, so probably the new finance minister may have to direct the regulator to lend a helping hand,” says Kuntal Sur, head of financial services at PwC. “It’s not as if they are facing any fiscal or tax hurdle the new FM can help with.’’Some 200 km away from where Ambani is finalising his asset sales to remain relevant, a competitor is smiling his way to the bank in Pune, the home of the Bajajs.Sanjiv Bajaj, managing director, Bajaj Finserv, is sitting on the biggest wealth of his life time at ?450 crore as his stock price reaches the sky while Ambani firm’s wealth turned into dust. While Bajaj Finance trades at 10.3 times its book value, Reliance Capital is at 0.2 times, data from Bloomberg shows.“Investors will trust NBFCs which managed the crisis well without RBI’s assistance, had strong internal norms and diversified into less riskier segments,” said Digant Haria, analyst, Antique Broking. “Those NBFCs to whom banks are willing to buy portfolio but averse to lending will gain confidence gradually as they realign the business practices related to ALM, concentration of sectors, ticket size of loans.”Painting the entire industry with the same brush would be doing injustice to those who have managed the risk well, while others compromised on it for higher market valuations. Many of the NBFCs, using cheaper funds from mutual funds, borrowed for short term to lend for long term to boost their profitability.“The NBFC sector on a broad base does not have a problem,” says Gautam Chhugani, director, India financials at Bernstein, a research house. “The problem is concentrated with the real estate-focused NBFCs. The Bajajs, Shrirams, Mahindras are not affected. They are able to raise money and drive disbursements.”While the chorus was that the entire industry was affected when the credit markets froze last year, there is a realisation that it was only in pockets such as mortgages where there was trouble. There too, it is mostly concentrated in builder loans where inventory has piled up.“There will be fear when there are sporadic events,” says Rashesh Shah, chairman, Edelweiss Financial. “There was fear when certain corporate groups defaulted. Octoberto-December was very challenging where even I didn’t know who is in what shape even within the industry. After March, I feel confident that all these are all manageable accounts. This is a liquidity problem and not a solvency problem as there is value in the asset.”Every top administrator would like to leave behind a legacy that future generations would talk about. In a society where development stands ahead of politics, achievements of economic administrators are keenly watched.In terms of economics, Manmohan Singh’s legacy as a finance minister is far outshined by his achievements as Prime Minister. Pranab Mukherjee’s is marked by “tax terrorism” and broken banks. P Chidambaram was the darling of markets.Would Sitharaman choose from the above, or from her recent predecessor and party colleague Arun Jaitley? Jaitley, who is being blamed for presiding over sliding economic growth rate, has left behind a banking system that is a lot clean and reliable.The asset quality review (AQR) of the RBI that he approved opened a can of worms, but ended the political legacy of kicking the can down the road. Although the ugliness of the banking system is in full glare, it ended the practice of banks and businesses sugar-coating bad practices as social necessity.“AQR will be a short-term surgical strike,” said Engineer of Motilal Oswal. “In the long term, it will definitely benefit the industry.”Former chief economic advisor Arvind Subramanian suggested that the central bank go for an AQR to restore confidence in the industry. Without a stamp of approval from the regulator, it would be difficult for investors to separate the good from the bad.“AQR is an absolute requirement and that will differentiate good ones from bad ones,” says Diwanji. “When they introduce AQR for NBFCs, RBI should introduce a comprehensive turnaround action plan.”There’s little doubt that the NBFC problems need to be addressed, but a thorough study of it is essential so that the good ones get the benefits while the bad ones meet their fate.“The new finance minister should make some positive statements to cheer up the NBFC sector and assure them that the finance ministry and the RBI will always stay vigilant if any need arises,” says Sur of PwC. “That is a better idea than forcing her to bring about some regulation to help them.”