{"id":48992,"date":"2019-07-08T19:00:26","date_gmt":"2019-07-08T13:30:26","guid":{"rendered":"https:\/\/blogadmin.forumias.com\/?p=48992"},"modified":"2019-07-08T15:17:10","modified_gmt":"2019-07-08T09:47:10","slug":"7-pm-how-easy-money-from-banks-led-nbfcs-into-crisis-8th-july-2019","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/7-pm-how-easy-money-from-banks-led-nbfcs-into-crisis-8th-july-2019\/","title":{"rendered":"7 PM | How easy money from banks led NBFCs into crisis | 8th July, 2019"},"content":{"rendered":"\n<p><strong><a href=\"https:\/\/drive.google.com\/open?id=1FaHIo-skCgRNLezXm3HOgYbF9MxqPsJ-\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Read\u00a0In-depth analysis of all the Editorials here (opens in a new tab)\">Read\u00a0In-depth analysis of all the Editorials here<\/a><\/strong><\/p>\n\n\n\n<p><strong>Context:\n<\/strong>&nbsp;The shadow banking in India.<\/p>\n\n\n\n<p>Shadow\nbanking or Non Banking Financial Companies (NBFCs) are financial intermediaries\nengaged in the business of accepting deposits and delivering credit and play an\nimportant role in channelizing the scarce financial resources to capital\nformation.<\/p>\n\n\n\n<p><strong>Different types of NBFCs:<\/strong>\nNBFCs are categorized <\/p>\n\n\n\n<ol class=\"wp-block-list\"><li>in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, <\/li><li>non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) <\/li><li>by the kind of activity they conduct. <\/li><\/ol>\n\n\n\n<p><strong>Within this broad categorization the different types of NBFCs are as follows:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Asset Finance Company (AFC) <\/strong>: An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive\/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real\/physical assets supporting economic activity and income arising there from is not less than 60% of its total assets and total income respectively.<\/li><li><strong>Investment Company (IC)<\/strong> : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,<\/li><li><strong>Loan Company (LC): <\/strong>LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.<\/li><li><strong>Infrastructure Finance Company (IFC)<\/strong>: IFC is a non-banking finance company that<ul><li>deploys at least 75 per cent of its total assets in infrastructure loans, <\/li><li>has a minimum Net Owned Funds of \u20b9 300crore,<\/li><li>has a minimum credit rating of \u2018A \u2018or equivalent <\/li><li>has a CRAR of 15%.<\/li><\/ul><\/li><li><strong>Systemically Important Core Investment Company (CIC-ND-SI)<\/strong>: CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:- <ul><li>it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;<\/li><\/ul><ul><li>Its asset size is \u20b9 100crore or above <\/li><\/ul><ul><li>It accepts public funds<\/li><\/ul><\/li><li><strong>Infrastructure Debt Fund:<\/strong> Non- Banking Financial Company (IDF-NBFCs): IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.<\/li><li><strong>Non-Banking Financial Company &#8211; Micro Finance Institution (NBFC-MFI):<\/strong> NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:(a). loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding \u20b9 1,00,000 or urban and semi-urban household income not exceeding \u20b9 1,60,000; (b).loan amount does not exceed \u20b9 50,000 in the first cycle and \u20b9 1,00,000 in subsequent cycles; (c). total indebtedness of the borrower does not exceed \u20b9 1,00,000.<\/li><\/ul>\n\n\n\n<p><strong>Role of NBFCs in Indian economy:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Inclusive Growth: <\/strong>NBFCs\n(Non Banking Financial Companies) play an important role in promoting inclusive\ngrowth in the country, by catering to the diverse financial needs of bank\nexcluded customers.<\/li><li><strong>MSME Credit<\/strong>: NBFCs often take lead\nrole in providing innovative financial services to Micro, Small, and Medium\nEnterprises (MSMEs) most suitable to their business requirements. According to\nthe report by Investment Information Credit Rating Agency Ltd (ICRA) puts the\ntotal credit supply deficit for the MSME sector at&nbsp;Rs 25 trillion. NBFCs\nhad the potential to fulfill the deficit.<\/li><li><strong>Financial intermediaries<\/strong>:\nNBFCs are financial intermediaries engaged in the business of accepting\ndeposits delivering credit and play an important role in channelizing the\nscarce financial resources to capital formation. They supplement the role of\nthe banking sector in meeting the increasing financial needs of the corporate\nsector, infrastructure sector, &nbsp;delivering credit to the&nbsp;<strong>unorganized sector<\/strong>&nbsp;and to small local\nborrowers.<\/li><li><strong>Development of economy:<\/strong>\n&nbsp;NBFCs do play a critical role in\nparticipating in the development of an economy by providing a fillip to\ntransportation, employment generation, wealth creation, bank credit in rural\nsegments and to support financially weaker sections of the society. Emergency\nservices like financial assistance and guidance is also provided to the\ncustomers in the matters pertaining to insurance.<\/li><li><strong>Credit creation:<\/strong> When banks slowed down their lending business in the wake\nof huge bad loans, NBFCs continued to grow at a higher pace. The share\nof NBFCs in total credit extended has increased from around 9.4% in March 2009\nto more than 17% by March 2018, data from the Reserve Bank of India\u2019s (RBI\u2019s)\nlatest financial stability report suggests.<\/li><\/ul>\n\n\n\n<p>Even\nthough the NBFCs played an important role in the Indian economy but in recent\ntimes the NBFCs are going through rough phase from the past one year. <\/p>\n\n\n\n<p><strong>Crisis of NBFCs: <\/strong>Debt-ridden\nIL&amp;FS, in which various corporate, as well as mutual funds and insurance\nfirms, had invested through short-term instruments like commercial papers and\nnon-convertible debentures (NCDs), has been defaulting on its several\ndebt-obligations since August. IL&amp;FS borrowings from banks and financial\ninstitutions add to nearly Rs 63,000crore as per the balance sheet of\n2017-2018, according to the Ministry of Corporate Affairs (MCA).<strong> <\/strong>Housing finance company DHFL on the verge of default on non\nconvertible bonds (NCB).<strong><\/strong><\/p>\n\n\n\n<p><strong>Reasons behind the crisis:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Too big to fail syndrome:<\/strong>\nThe &#8220;<strong>too big to fail<\/strong>&#8221; theory asserts that certain\nfinancial institutions are so large and so interconnected that their failure\nwould be disastrous to the greater economic system, and that they, therefore,\nmust be supported by government when they face potential failure. India is\ncurrently grappling with one such crisis.<\/li><li><strong>Easy money from Banks:<\/strong>\nThe increasing non performance assets (NPA) in scheduled commercial banks,\nbanks find NBFCs are safe assets to invest. As of march 2017, bank lending made\nup 21.2% of NBFCs borrowings. This figure jumped to 23.6% as of 31<sup>st<\/sup>\nmarch and finally to 29.2% as of 31<sup>st<\/sup> march 2019.<\/li><li><strong>Short term borrowings: <\/strong>NBFCs had borrowed short term from banks and mutual funds\nwhile lending to developers of long-term projects, which got held up because of\nvarious factors. They also lent to unscrupulous developers and willful\ncorporate defaulters indulging in round tripping of funds and ever-greening of\nloans.<\/li><li><strong>Liquidity crunch:<\/strong> NBFCs have been complaining that\nraising funds is becoming more and more difficult with flow from banks almost\ndrying up.<\/li><\/ul>\n\n\n\n<p><strong>Measures taken by the Government to improve the condition of\nNBFCs:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Empowering RBI:<\/strong>&nbsp; The Budget\n(2019-20) has given the RBI sweeping powers over housing finance companies\n(HFCs) and NBFCs, including the power to change the management at these firms.\nThe Budget has relieved the National Housing Bank (NHB) of its regulatory\npowers over HFCs and handed them back to the RBI. Indeed this is a good move by\nthe government to strengthen the norms to control future NBFCs crisis.<\/li><li><strong>High quality liquidity assets (HQLI):<\/strong> The&nbsp;RBI&nbsp;has released a draft circular on the &#8216;Liquidity Risk\nManagement Framework for&nbsp;NBFCs&nbsp;and\nCore&nbsp;Investment&nbsp;Companies (CICs). An\nNBFC shall maintain an adequate level of unencumbered HQLA (High Quality Liquid\nAssets) that can be converted into cash to meet its liquidity needs for a 30\ncalendar-day time horizon under a significantly severe liquidity stress\nscenario, The draft said.<\/li><li><strong>Liquidity flow:<\/strong> The government assured the market flow of needed liquidity\nby the NBFCs. Along with that government should encourage the public sector\nbanks to buy high rated pooled assets of up to 1trillion Rs. To implement this\nmeasure successfully RBI will tweak the bank\u2019s bond holding norms of government\nsecurities.<\/li><li><strong>Foreign investment:<\/strong> &nbsp;the government has allowed the foreign portfolio\ninvestors (FPIs) to sell investments in debt securities issued by\nInfrastructure Debt Fund\u2013Non-Bank Finance Companies (IDF-NBFCs) to any domestic\ninvestor within the specified lock-in period. It is one of measures proposed to\nenhance the sources of capital for infrastructure financing.<\/li><\/ul>\n\n\n\n<p><strong>Way forward<\/strong>: To achieve $ 5\ntrillion economy status by 2024, Indian economy needs to invest around Rs.100\ntrillion needed in next 5 years. Commercial banks alone will not fulfill the\nneeded capital. NBFCs will be good potential in future investments, so the\ngovernment should promote the needed measures to the sustainable growth of\nNBFCs sector in India.<\/p>\n\n\n\n<p>Source: <a href=\"https:\/\/www.livemint.com\/industry\/banking\/how-easy-money-from-banks-led-nbfcs-into-crisis-1562520422782.html\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">https:\/\/www.livemint.com\/industry\/banking\/how-easy-money-from-banks-led-nbfcs-into-crisis-1562520422782.html<\/a>. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Read\u00a0In-depth analysis of all the Editorials here Context: &nbsp;The shadow banking in India. Shadow banking or Non Banking Financial Companies (NBFCs) are financial intermediaries engaged in the business of accepting deposits and delivering credit and play an important role in channelizing the scarce financial resources to capital formation. Different types of NBFCs: NBFCs are categorized&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/7-pm-how-easy-money-from-banks-led-nbfcs-into-crisis-8th-july-2019\/\">Continue reading <span class=\"screen-reader-text\">7 PM | How easy money from banks led NBFCs into crisis | 8th July, 2019<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":3567,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130],"tags":[],"class_list":["post-48992","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-7-pm","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2017\/07\/brief-image.jpg?fit=1000%2C500&ssl=1","views":{"total":0,"cached_at":"","cached_date":1704766310},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/48992","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=48992"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/48992\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/3567"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=48992"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=48992"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=48992"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}