The recent liquidity crisis provides an opportunity to focus on structural reforms agenda and to enable sustainable growth of the Non-Banking Financial Companies. Justify (200 Words)
Refer - Financial Express
Enrich the answer from other sources, if the question demands.
IAS Parliament 5 years
KEY POINTS
· NBFCs have graduated from being a significant class of lender to being a dominant supplier of credit to several segments. In FY19, NBFCs contributed 40% of new loan accounts in retail, consumer, housing, and small business segments.
· The government’s budget announcement to provide first loss guarantee for portfolio purchases from NBFCs, and a slew of measures from RBI to ease flow of credit to NBFCs are strong signals that the state is backing this pillar of Indian lending.
· Further, changes in the RBI Act, giving it more powers to better supervise and regulate NBFCs, clearly signal the intent for a more hands-on role of the regulator towards developing the NBFC sector.
Focusing on reforms
· Regulation, innovation in funding instruments, bank finance reforms, strengthening market discipline, and reinforcing systemic support for NBFCs.
· The regulatory requirement for liquidity and capital should, ideally, be cognisant of this structural diversity, and avoid one-size-fits-all regulations, particularly with respect to liquidity and capital requirement. Else, it may potentially distort market structure, affecting credit availability in certain segments.
· Apart from banks and mutual funds, we need to enhance funding from insurance and pension funds. Such long-term investors are risk-averse by design.
· Banks need to treat NBFC as partner, not borrower. Banks’ lending model of treating NBFCs as any other institution borrower needs to change. Co-lending may be the preferred model of the future.
· The co-lending scheme, introduced by RBI, allows NBFCs to lend to customers jointly with banks. NBFCs acquire the customer, lend a part of the loan to them, and provide first loss guarantee to the banks to lend the remaining part.
· Banks and NBFCs can operate more closely. Technology integration of their systems will ensure much faster decision-making, and seamless customer experience while controlling the risk.
· As the present crisis has shown, liquidity, more often than insolvency, takes an NBFC down. NBFCs require a lender of last resort. We need one institution that has the capability to undertake repo of securities, backed by NBFC loan portfolio, that can be resorted to at a time of need, to raise funds for short periods.
Kiran sharma 5 years
Review please
Thank you
IAS Parliament 5 years
Good attempt. Try to mention about IL&FS crisis. Keep Writing.,
Shivangi 5 years
Please review. Thanks
IAS Parliament 5 years
Try to stick to word limit and mention about IL&FA crisis. Keep Writing.
hema 5 years
IAS Parliament 5 years
Good answer. Keep Writing.
Aspirant 20 5 years
Kindly review
IAS Parliament 5 years
Try to include about recent crisis IL&FS. Keep Writing.
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