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NON-BANKING FINANCIAL COMPANIES (NBFCS) (Current problems with NBFCs…
NON-BANKING FINANCIAL COMPANIES (NBFCS)
Background
RBI recently allowed banks to provide partial credit enhancement (PCE) to bonds issued by systemically important non-deposit taking NBFCs registered with the RBI and Housing Finance Companies (HFCs) registered with the National Housing Bank
Credit enhancement means improving the credit rating of a corporate bond
Current problems with NBFCs
Multiple regulatory bodies
RBI doesn’t regulate all the NBFC
Other institutions such as NHB (National Housing Bank), SEBI, Insurance Regulatory and Development Authority (IRDAI), etc. are also involved depending on the type of NBFC
Difficulties in access to credit
interest rates are now going up
asset-liability mismatch
investors are getting reluctant to lend post the IL&FS crisis
Riskier Lending Pattern
Cascading effect of Infrastructure Leasing and Financial Services (IL&FS) default
Delayed Projects
Way Forward for NBFC sector
Better Regulatory Regime
The Financial Sector Legislative Reform Commission (FSLRC) recommendation of creating a body with powers to monitor risk-cutting
Timely Project clearances
Suggestions for RBI
RBI must encourage non-banking financial companies to securitise their assets that can be purchased by banks
RBI must revisit lending restrictions placed on banks under Prompt Corrective Action
RBI may also open special window for mutual funds
coordinated and consultative approach