The NBFC crisis is a situation where NBFC face liquidity problems and losses by default loans, NPA, and high-interest debts.
Non-banking financial companies play a vital role in the economic growth of the country. These financial companies provide funds to infrastructure projects like real estate companies, businesses, and individuals. These financial institutions offer banking services in the market.
What are you going to explore:
- What is the NBFC crisis in India?
- Reasons behind the NBFC crisis
- How the NBFC crisis started in India
- How to solve the NBFC crisis
- Steps were taken by the government for NBFC crisis
- Impact of lockdown on NBFCs
What is the NBFC Crisis in India?
Non-Banking financial companies provide long term credits and good exposure to real estate as compared to a bank loan to businesses and other infrastructure projects. NBFC help to develop the financial market in the country which results in economic growth.
NBFCs provide loans to those projects, businesses, and individuals who do not get sanction approvals from the bank. NBFCs lend money from banks for the short term periods and lend forward these loans to other parties.
The tenure of these loans lends to customers by NBFCs range from 12 months to 7 years. As a result this causes an increase in the number of non-performing assets.
NBFC crisis starts with continuous defaults by the IL & FS Company which leads to a reduction in monetary supplies. Being a fiscal head of government and monetary head of RBI, there is the clash between both the parties.
The government tries for easier fund flows on the other hand RBI gives the statement that ample money available in the system and there is no need to infuse more liquidity in the market.
Reasons behind the NBFC Crisis
By the impact of provisions in land acquisition law 2013 that in case of public and private partnership projects approval of 70% of the affected families of land occupied is required
On the other hand In the case of private infrastructure approval of 80% of the affected families of occupied land should be required which results in the failure of infrastructure projects.
Default cases of IL&FS
Being an infrastructure funding company due to change and new amendment of provisions in the land acquisition law.
The projects of IL&FS and projects start to become unsuccessful which will cause default payments (bad loans) of IL&FS. These default payments increase the number of NPA’s.
As a result, this whole process becomes the reason behind the lack of revenue in companies like IL&FS and other housing finance companies in the NBFC sector.
Auditing problem of IL&FS
Due to the false representation of data in the balance sheet by the company in the audit or by continuous audit problem.
However auditors are unable to point out and highlight the issues related to default cases and other issues of the company.
Loss in Investments
Various corporate, insurance companies, mutual funds companies, etc invested in short term facilities like commercial papers, Fixed income instruments of IL&FS.
After the increase in Non- performing assets of company investors start showing disinterested and resist investing in the company.
Funding constraints of Banks
Due to the shortage of liquidity; banks slow down the lending of funds to NBFC which will create a shortage of funds for NBFC.
The decline in Stock Market
NON- BANKING FINANCIAL COMPANY were already facing an issue with the high-interest rate on funds lend by banks.
After the continuous defaults, investors start showing less interest, and limited funds received from banks it results in a lack of funds availability for NBFCs which further results in a decline in the stock market.
How the NBFC crisis started in India
There were asset and liability mismatches in the operation.
NBFCs lend money from banks for the short term periods and lend forward these loans to other parties for longer periods.
Postponement of infrastructure projects will affect the profits of NON- BANKING FINANCIAL COMPANY like IL&FS.
“Statement given by formal RBI governor Raghuram Rajan in news live”- The central bank has to figure out whether it is a liquidity problem or a solvency problem.
It involves the physical use of funds and therefore the government has to be direct in that put in tax payer’s money on risk.
Liquidity Problem – infusing liquidity in the market will resolve the issue.
Solvency problem – some of the entities have taken bad assets and downgrade.
Lending through entities that can make direct loans to NBFCs allowing banks to guarantee bonds to the NBFCs.
How to solve the NBFC crisis
NBFC lending should be put under the priority sector. we know that the public sector banks have 40% of priority sector targets, so under this priority sector agriculture, education, exports, housing, MSME are quartered.
Expanding the scope of one-time partial guarantee because the govt is providing a credit guarantee only to 10% of the total assets this can be expended
NBFC sector should be under the priority sector because under the priority sector lending credits given as concessional rates if NBFC will have access to cheaper funds or cheaper credit then the NBFC liquidity crisis can be resolved.
Steps were taken by the government and RBI for NBFC crisis
Reserve bank of India
starts purchasing govt. securities from the open market (bond market) in order to inject money in the system and debt instruments like commercial papers of NON- BANKING FINANCIAL COMPANY (NBFCs).
Reserve bank of India will fund 1 lakh crore rupees to high-quality assets of financially stabled NON- BANKING FINANCIAL COMPANIES. source
Push – bank lending
Government is promoting the banks and bank lenders to fund NON- BANKING FINANCIAL COMPANY (NBFC) with credit guarantees of 10% of assets value valid for the two years of the purchase of an asset by bank
Monetary policy committee
has made several announcements regarding minimizing the repo rate in four consecutive reviews which will increase the money supply in the economy.
Commercial banks will cut down interest rates so that NBFC raises finance from commercial banks at fewer rates as compared to the previous scenarios.
State Bank of India proposed an offer to buy good assets quality worth rupees 45000 crores of NBFC which will help to resolve the liquidity problem.
RBI Utkarsh 2022 scheme: a three-year medium-term roadmap to improve the regulation and supervision of Reserve Bank of India.
Medium terms strategies for NBFCs:
- Implementation of Indian accounting standards for proper accounting and auditing procedures to resolve the auditing problems faced at the time of the IL&FS crisis.
- Establishing strong standards, guidelines, and instructions through enforcement of regulation regulations and for the cancellation of licenses.
- Different monitoring guidelines and frameworks for NBFCs and micro finances (small NBFCs).
Impact of lockdown on NBFCs
Due to the pandemic situation of COVID-19 whole world is suffering. Major economies of the world are paying a huge price for it and have been locked themselves completely.
In-country like India where the economic growth has been already slowing down, sectors like manufacturing, automotive, real estate, micro, small, medium enterprises, and non-banking financial companies are already suffering and having a decline in their business.
To make the condition even worst; the government has to lock down the entire country other than essential services to control the rapid spread of the coronavirus which heavily impacts the market conditions and economic growth of India.
Financial companies like NBFCs which are already suffering from a crisis of shortage of funds, low productivity, and an increase in the number of non-performing assets are having a huge decline in the market.
Operation departments have been closed due to the lockdown period and the repayments are limited to auto-debit options. Disbursement of loans has been stopped and payments received by the customers at branch level have been stopped.
Due to the low income, poor spending habits, and lack of excess money or emergency funds in the bank accounts of people in India.
NBFCs were already working at cost-cutting in order to decrease the shortage and wastage of funds due to the lockdown period NBFCs have to lose repayments from various direct customers. Because of the shutdown of various businesses in lockdown the liquidity of cash has decreased.
The daily wages class is suffering from the lockdown because they do not have the money for survival and bills to pay.
As a result due to the lack of liquidity situation of the NBFCs crisis has somehow become a worst and lockdown impact the NBFCs very hard.
Non-banking financial companies (NBFCs) are very important for the economy and its growth. Non-banking financial companies (NBFCs) increase liquidity in the market.
Non –banking financial companies promote capital formation in the economy. NBFCs serve the shadow banking system.
NBFCs provide loans to those who face the problem or not get sanction approval from banks these companies made the process easy for the business units and infrastructure projects which will result in the development of the country.
Due to back to back financial failures, NBFCs are struggling. Government and Reserve Bank of India are taking steps towards resolving the financial crisis of this sector.
When crisis resolves it will provide a boost to economic growth which will help the Indian economy to reach 5 trillion economy brackets.
Answer: Lack of funds for operations and an increase in NPAs due to default cases cause the NBFC crisis.
Answer: NBFCs in India are unable to recover NPAs and not getting funds from banks.
Also investor is no longer interested to invest in NBFCs this will create a liquidity crunch this whole process is called NBFC crisis.
Answer: 1. Increase in the number of Default cases.
2. Delay in the completion of infrastructure projects.
3. Lack of funds provided to NBFCs.
4. High interest on loans lends to NBFC.
5. Fault in the business model of NBFC.
Answer: 1. Pending infrastructure projects,
2. Lending short term loans at high rates for the long term at a higher rate,
3. And an increase in NPA is the reason behind the crisis.
Answer: Continuous Default cases of IL&FS increase in the number of NPAs fire up the crisis.
Answer: When NBFC is facing blockage of money from all the factors that will create a liquidity crisis.
Answer: Crisis in NBFC can directly impact the economic growth of the country.