Shares of non-banking financial companies (NBFCs) nosedived on Friday after a sudden panic-selling in DHFL stock spooked market sentiment.

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A fund house reportedly sold a large quantum of commercial papers of DHFL at a steep discount, triggering fears of a liquidity crunch.

DHFL shares tanked more than 50 percent due to panic-selling to hit its lowest levels in 19 months and traded at Rs 274.75 per share.

Fears of liquidity crunch had a domino effect on the benchmark indices with both the Sensex and the Nifty erasing all morning gains.

The BSE Sensex fell more than 1,000 points, hitting the day's low of 35,993.64 from the high of 37,489.24. While the NSE Nifty50 too breached 11,000 mark, falling to the day's low of 10,866.45, from the day's high of 11,346.80.

Apart from DHFL, Indiabulls Housing Finance, M&M Finance and Bajaj Finance plunged more than 24 percent, 9.5 percent and 7.53 percent, respectively.

Nifty Financial Services index fell to 10,451 points from the day's high of 11,187. It traded lower by 2.36 percent at 2.35 pm.

DHFL, however, later recovered after CMD Kapil Wadhawan, in an interview with CNBC-TV18, clarified that there was no default and that the company was in a sound position.

"This has come as a big surprise and a shock to me ... we are extremely conservative in maintenance of liquidity, there is no default what so ever. The repayment are not even due yet and there is ample liquidity lying with us in system to take care of interest as well as the principal pay-outs over the next couple of quarters. So, all this what we are seeing is a panic driven, panic stricken market reaction," said Wadhawan.

Wadhawan said the firm has liquidity of close to Rs 10,000 crore in addition to monthly collections.

"My total liability position, say till March 31st is just Rs 4,800 crore. Obviously, there is some amount of CP(commercial paper) that is also there in the system but it is not a very big amount. At the same time there is close to Rs 10,000 crore of liquidity available with us in the system other than the collections that we accrue on a monthly basis. Those collections are anyway between Rs 2,500-3,500 crore a month, so from that perspective we are extremely comfortable," he added.

While Gagan Banga, managing director of Indiabulls Housing said, “For the past 11 years we have maintained the principle of keeping 20 percent of our loan book in cash and have over Rs 21000 crore in cash, of which about 65 percent is kept with MFs."

“Specifically for Indiabulls Housing we have 125 percent of what we will need to grow our business and take care of all of our principle and interest liability for next six months,” added Banga.

Meanwhile, SK Hota, managing director of Can Fin Homes said borrowing is not an issue as far as his company was concerned because they were backed by strong credit lines from banks. “At any point in time we have got adequate unavailed credit limits on the banks. Historically, Can Fin has never ever gone for sourcing money from market for any payment,” he said.

Reacting to the steep downfall in NBFC shares, FIDC chairman Raman Aggarwal said, “There is absolutely no identifiable reason for the downfall in NBFCs stocks today. The Financial Stability Report of RBI dated June 2018 had in fact presented a very impressive picture of NBFCs as on March 31, 2018. The stress and resilience tests done on the NBFC sector with presumption of an increase in NPA levels also shows that the average CRAR of the NBFC sector shall still continue to be over 20 percent as the prescribed levels of 15 percent.”

Aggarwal says panic selling in DHFL shares was driven by speculation without any basis. “Any minor reduction in MF funding cannot create any real liquidity or funding issues. It is purely a sentiment purely driven by speculation without any strong basis,” he added.

First Published:Sept 21, 2018 3:01 PM IST