New Delhi: The Government of India believes the current liquidity crisis that has gripped the country’s non-banking financial companies (NBFC) will get over soon as steps have been announced to ease funds flow to the sector.
NBFCs facing constraints of higher costs and reduced borrowing capacity “would be out of the woods” soon, Subhash Chandra Garg, Secretary, Economic Affairs, Ministry of Finance, told ThePrint in an interview.
The NBFC situation was triggered by a financial crisis in the Infrastructure Leasing and Financial Services (IL&FS). The government, in its recent budget, has given Reserve Bank of India (RBI) additional regulatory and resolution powers over private sector NBFCs facing liquidity crisis.
RBI can now supersede boards of such NBFCs, remove their top management and directors, as well as inspect and audit accounts of group firms by seeking financial statements. Resolution powers, on the lines of those available under the insolvency and bankruptcy code, include formulating schemes for amalgamation of a firm or splitting its assets or going in for reconstruction.
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More regulatory power to RBI
The Union Budget presented by Finance Minister Nirmala Sitharaman on 5 July announced a one-time, six-month partial credit guarantee scheme for Indian banks. Under this scheme, purchase of high-rated pool assets of financially sound NBFCs by banks will be guaranteed to accommodate up to 10 per cent of the first loss incurred by them.
Later, the RBI also announced an additional liquidity support to banks for purchase of such assets from NBFCs.
Garg pointed out that steps taken by the government – giving liquidity support, additional regulatory and resolution powers to RBI – will help in “restoring normalcy”.
He also explained why the government decided to shift regulatory powers over housing finance companies from the National Housing Bank (NHB) to RBI.
“There was a conflict in NHB’s mandate. Besides framing regulations, it was also providing refinancing and direct finance options to housing finance companies. So, there was an overlap between its regulatory and financial functions,” he said, adding the government also felt “RBI is in a far greater position to regulate housing finance companies than NHB”.
The liquidity crisis had emerged after one of IL&FS’ group firms defaulted on a debt repayment in August 2018. The liquidity crunch that followed has pushed some firms such as Dewan Housing Finance on the verge of a repayment default.
With the imminent threat of a looming system-wide collapse, the government and the RBI announced a series of steps Friday to tackle this problem. Garg said these steps should help bring confidence in the market.
Also read: Credit guarantee to banks, more powers to RBI as Modi govt moves to nip NBFC crisis in bud