NBFCs will gain from formalisation - The Hindu …

NBFCs will gain from formalisation - The Hindu BusinessLine

Indian financial reforms have aimed to create a stable, commercially viable sector that supports development and inclusion. The liberalization initiated in the 1990s, which combined domestic market development with gradual capital account convertibility, successfully navigated domestic crises and the global financial crisis (GFC) with minimal impact. However, post-GFC over-stimulus and pro-cyclical regulation led to a significant increase in bank non-performing assets (NPAs), which negatively affected growth. The COVID-19 pandemic was expected to exacerbate the situation, particularly for public sector banks (PSBs). Contrary to expectations, NPAs improved due to liquidity injections and regulatory support that built on previous bankruptcy reforms. This improvement highlights the importance of countercyclical prudential regulations that provide support during downturns and create buffers during good times, thus reducing financial fragility. Non-bank financial companies (NBFCs) play a crucial role in India s financial landscape, leveraging customer knowledge to reach underserved areas and improve financial inclusion. Unlike banks, NBFCs are not permitted to raise deposits from customers and do not have access to the RBI s liquidity windows. However, they rely heavily on banks for liquidity, with 40-50% of their funding coming from banks. After the 2014 demonetization episode, some NBFCs borrowed short-term and lent long, leading to liquidity issues for systemic NBFCs like IL&FS. The absence of a lender of last resort (LOLR) facility contributed to their insolvency in 2018. The subsequent tightening of regulations has made it difficult for some NBFCs to maintain viable business models, leading to a reduction in diversity in financial services. In response to these challenges, the RBI has adopted a tiered regulatory approach, which is stricter for larger, potentially systemic NBFCs. This has led to protests from smaller NBFCs, which claim a lack of expertise and difficulty in complying with rigid reporting requirements. However, better capital adequacy, disclosure, and risk-based lending can

Source: thehindubusinessline.com
Published on 2024-09-16

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