Why WB’s foreign –bank prescription isn’t best cure for India

Why WB’s foreign –bank prescription isn’t best cure for India

Context:

World Bank’s annual Global Financial Development Report 2017-18 released recently.

Key highlights of the report:

• Restrictions imposed on foreign banks in developing countries are hampering prospects of growth by limiting the flow of much needed finance to firms and households.
• In its annual ‘Global Financial Development Report 2017/2018:Bankers without Borders”, the World Bank said that international banking can have important benefits for development, but is no panacea and carries risks.
• Developing economy policymakers would do well to consider how to maximise the benefits of cross-border banking while minimising its costs.
• Bank finance is essential for a vibrant private sector, and nurturing small and medium-sized businesses, the report said.
• Developing countries can maximise benefits from a stronger banking system while shielding against risks through improving information sharing through credit registries, enforcing property and contract rights, and guaranteeing strong supervision of banks.
• The global financial crisis has certainly led to a reevaluation of the potential benefits and costs of bank globalisation because many observers perceive global banks to have been mainly responsible for the transmission of shocks across borders.
• Enabling foreign bank entry and improving financial openness -alongside well-functioning capital markets – can offer systemic benefits, including improved financial stability, greater competition, and improved resilience to economic shocks.
• Besides public and private banks, Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs) too have rapidly enlarged their footprint over the past decade, increasing the flow of financing to the very firms and households that the World Bank report said.

About NBFCs:

• Non-Banking financial companies are financial institutions that provide certain types of banking services, but do not hold a banking license.
• These institutions are not allowed to take deposit from the public, which keeps them outside the scope of traditional oversight required under banking regulations.
• NBFCs can offer banking services such as loans and credit facilities, retirement planning, money markets, underwriting and merger activities.
• Non Banking Financial Company is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds hire-purchase, insurance business or chit business but does not include any institution whose principal business includes agriculture, industrial activity or the sale, purchase or construction or immovable property.
• The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 and directions issued by it.

Types of NBFC:

1. Asset Finance Company (AFC): An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/ economic, such as automobile, tractors, lathe, machine, generator etc.
2. Investment Company (IC): IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.
3. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advance or otherwise for any activity other than its own but does not include an Asset Finance Company.
4. Infrastructure Finance Company (IFC): IFC is a non-banking company which deploys at least 75 per cent of its total assets in infrastructure loans, has a minimum Net Owned Funds of Rs 300 crores and has a minimum credit rating of ‘A’.
5. Infrastructure Debt Fund: It is a registered company as NBFCs to facilitate the flow of long term debt into infrastructure projects.

Micro Finance Institutions:

Micro Finance Institutions, also known as MFIs, a microfinance institution is an organization that offers financial services to low income populations. Almost all give loans to their members, and many offer insurance, deposit and other services. Great scales of organizations are regarded as microfinance institutes. They are those that offer credits and other financial services to the representatives of poor strata of population