How Easy Money From Banks Led NBFCs Into Crisis

By jyoti July 9, 2019 12:51

In the budget, the finance minister said fundamentally sound NBFCs should continue getting funds from banks for which the center will provide a partial credit guarantee

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  •       Non-banking financial companies have been in trouble since 2018.
  •       Gross non-performing assets (NPAs) of NBFCs as of 31 March 2019 stood at 6.60%.

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

o   This means a greater proportion of loans given by NBFCs is not being repaid than in the past.

Bank Funding to NBFC

  •       Like banks, Non-banking financial companies give out loans. Banks lend by taking deposits directly from the public. That’s not the case with most Non-banking financial companies.

o   Only 88 of the 9,659 NBFCs take deposits. In order to give out loans, most 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 last two years, the share of bank borrowing as a proportion of total borrowings of Non-banking financial companies has gone up. This is where the problem lies.

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

The issue with Bank Funding

  •       Easy funding from the Banks led to a small fall in lending standards and that has ultimately shown up in higher gross NPAs. But the trouble at Non-banking financial companies such as Infrastructure Leasing and Financial Services Ltd, and Dewan Housing Finance Corp. Ltd forced banks and mutual funds away from Non-banking financial companies.

Way Ahead

  •       Reserve Bank of India should carry out an asset quality review of Non-banking financial companies as well, at least some of the larger ones as it did in the case of banks in mid-2015.
  •       Also, there is a great need to share agglomerated Non-banking financial companies data in the public domain that is currently the case.

o   In recent years, most financial crises around the world have started in the shadow banking sectors, which is where NBFCs belong.

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By jyoti July 9, 2019 12:51