A relatively insignificant event triggered a massive scare in Indian financials on Friday. But, the story does not lie there. It lies in the institutional imperatives clashing with individual investor interests. When there is a problem, either of solvency, liquidity or of risks, it is the bigger investors who bail out first.
The US 64 crisis is a classic example of this behaviour. Retail investors had to wait for years to get their capital back. The loss of opportunity was significant, and strangely, retail investors bore it quietly. The current crisis in a leading infrastructure lender is many times bigger than the UTI crisis. Importantly, it comes with the same symptom of US 64. The lenders run a potential risk of getting stuck without receiving monies for an indefinite period. This is going to make corporates who have parked surplus with such lenders to rush for the exit gate.
It is fair to extend that the debt mutual funds are going to struggle to meet bulk redemptions in an already illiquid market. This was what we witnessed on Friday. While the focus was intensely on which paper got sold and for what reason, we have not got any whiff of which large investor caused this panic. That is where the challenge lies for all market participants and by extension the regulator, as well as the Finance Ministry. We need a strong proactive mechanism to provide liquidity in such situations.
Memory may be short, and most would have forgotten how the RBI and the Finance Ministry reacted to avert a crisis the last time this happened. But, we are going to need much stronger effort and heavy lifting from both in the near future. These are interesting times.