How Easy Money From Banks Led NBFCs Into Crisis

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By moderator July 9, 2019 12:51

In the budget, the finance Ministry Stated Fundamentally sound NBFCs should keep on Acquiring capital from banks in which the Centre will provide a partial credit guarantee.

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  • Non-banking money related organizations have been in a tough situation since 2018.
  • The gross non-performing assets (NPAs) of this NBFCs on 31 March 2019 stood at 6.60 percent.

o   This is the worst in a period of six years.

O This means a larger percentage of loans which are given from the NBFCs isn’t being repaid than previously.

Bank Funding to NBFC

  • Like banks, Non-banking financial businesses give out loans. Banks lend by accepting deposits directly from the general public. That is not true with the majority of Non-banking financial businesses.

O Just 88 of those 9,659 NBFCs accept deposits. To be able to give out loans, many Non-banking financial companies borrow from banks and sell commercial paper.

  • The commercial paper they sell is basically short-term financial securities, which debt mutual funds buy.
  • Non-banking financial companies depend on public funds, which account for around 70% of their liabilities.
  • In the previous two years, the share of bank borrowing as a percentage of total borrowings of Non-banking financial companies has gone up. This is where the difficulty lies.

Conclusion As of 31 March 2017, bank lending composed 21.2 % of Non-banking financial companies borrowings. This figure jumped to 23.6% as of 31 March 2018 and to 29.2% as of 31 March 2019.

The issue with Bank Funding

  • Easy financing from the Banks resulted in a small fall in funding criteria which has shown up in greater gross NPAs. However, the problem at Non-banking financial companies like Infrastructure Leasing and Financial Services Ltd, and Dewan Housing Finance Corp. Ltd compelled banks and mutual funds from Non-banking financial companies.

Way Ahead

  • The Reserve bank of India should execute an asset quality inspection of Non-banking financial companies also, at least a few of the bigger ones as it did in the case of banks at mid-2015.
  • Additionally, there’s a fantastic need to discuss agglomerated Non-banking financial companies information in the public domain that’s now the situation.

O In the last few decades, the most financial disasters around the globe have begun from the shadow banking businesses, which will be where NBFCs belong.

Also read: RBI proposes to introduce LCR norm for NBFC sector

The Non-Banking Financial Company

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moderator
By moderator July 9, 2019 12:51