As the cascading impact of the crisis in the non-banking financial companies (NBFC) threatens to engulf the entire financial sector, the first task for the new government will be to alleviate the stress in this sector. With the liquidity scenario in the industry having worsened over the last couple of months and a number of NBFCs putting a stop to fresh loan disbursements, there is an acknowledgment in the government that these issues need to be addressed with alacrity to prevent the liquidity stress from worsening.
The consensus is that the next government will have to step up capital infusion into public sector banks, two senior officials in the Finance Ministry told The Indian Express. The danger of NBFC stress spilling over to financial sector has risen instead of receding. While it is difficult to distinguish liquidity issues from solvency issues of companies, the government can only address liquidity issues, the official said.
The recent feedback that we gathered from top banks is that the financial sector needs significant repair in the next six months, another official said. With its fiscal situation stretched, the Centre may have to bank upon the Reserve Bank of India. A committee headed by former Reserve Bank Governor Bimal Jalan, on the issue of determining appropriate capital reserves for the RBI, is likely to submit its report next month.
In a report in April, Bank of America Merrill Lynch had estimated that the Jalan committee is likely to identify an excess buffer of up to Rs 3 lakh crore. This includes the excess capital in contingency reserves and also revaluation reserves, it said, pegging the RBI s excess capital at Rs 1-3 lakh crore. Sources said the Finance Ministry, in its deliberations with the panel, said there is no legal challenge in dipping into the RBI s past reserves built over the years.
After the IL&FS group started defaulting on its aggregate debt of over Rs 90,000 crore since last September, financial sector entities including NBFCs, mutual funds, corporate-focused lenders have faced liquidity challenges. The situation only worsened over the last month as rating agencies started downgrading debt papers issued by NBFCs, thereby weakening their ability to raise funds to do business. This has created further uncertainty in the markets, said a top official with a NBFC.
The credit rating agencies (CRAs) are causing the next short-circuit in the Indian economy. Impacted by market pressure, regulatory intervention, parliamentary supervision and on how India has a high number AAA rated entities seemed to have spooked the CRAs, forcing them to downgrade companies or put them on credit watch. This has in turn created further panic in the market, said a senior official with a NBFC.
Sources say that the industry players have started seeing accelerated payment notices, thereby causing panic in the markets.
With banks going slow on credit disbursal in the economy over the last two years, NBFCs took the lead, and thus accounting for a significant portion of the additional credit in the market.
According to an RBI report on the NBFC sector, the consolidated balance sheet of NBFCs expanded in 2017-18 and in 2018-19 (up to September), buoyed by strong credit expansion . The data shows that while the loans and advances by NBFCs stood at Rs 14.85 lakh crore in March 2017, it rose by over 33 per cent to Rs 19.84 lakh crore in September 2018. In the same period, the gross credit growth for scheduled commercial banks expanded from Rs 71.39 lakh crore to Rs 80.25 lakh crore, witnessing a growth of 12.41 per cent in the 18-month period.