NBFCs
will gain from formalisation
NBFCs will gain from formalisation
Updated - September 16, 2024 at 09:13 PM.
In today’s digital age, it will allow NBFCs to gain cheaper credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит from
diverse sources, to innovate responsibly
By Ashima Goyal
Comments
Share
Copy link
Email• Коммуникации » Интернет-коммуникации » Электронная почта
Facebook• Объект организация » Организации по алфавиту » Организации на Me » Meta (компания) » Facebook
• Объект организация » Организации по алфавиту » Организации на Fa » Facebook
Twitter• Объект организация » Организации по алфавиту » Организации на Tw » Twitter, Inc.
Telegram
LinkedIn
WhatsApp
Reddit
READ LATER
Remove See All
The financial sector has surprised positively after the pandemic | Photo
Credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит: PTI
Indian financial reforms aim for a deep, stable, commercially viable financial
sector that can safely and efficiently finance• Экономика » Финансы » Государственные ценные бумаги
• Экономика » Финансы » Управление рисками » Арбитраж (экономика)
• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит
• Экономика » Финансы » Управление рисками » Хеджирование
• Экономика » Финансы » Производный финансовый инструмент » Хеджирование development with inclusion.
The liberalisation that started in the 1990s followed a unique combination of
domestic market/regulatory development and gradual capital account
convertibility that avoided domestic crises and survived the global financial
crisis• Финансовый кризис (GFC) with minimal impact. But over-stimulus and pro-cyclical
regulation after the GFC contributed to large bank non-performing assets
(NPAs). Credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит crashed with the over-regulation that followed, hurting growth.
The pandemic was expected to make things worse. Public sector banks (PSBs)
were seen as fragile. But because of liquidity injections and time-barred
regulatory support that built on recoveries from bankruptcy• Государство » Законы и право » Гражданское право » Несостоятельность reforms, NPAs
improved instead of deteriorating.
Clear lessons, in addition to the earlier ones on diversity and balance, are
the importance of countercyclical prudential regulations that support in bad
times and create buffers in good times, inducing better behaviour and reducing
financial fragility.
Is regulation currently applying these lessons? Let us examine complaints from
non-bank financial companies (NBFCs) of over-regulation from these
perspectives.
Contribution of NBFCs
NBFCs have a special role in a heterogeneous India, since their prime
differentiator is leveraging tacit customer knowledge to reach finance• Экономика » Финансы » Государственные ценные бумаги
• Экономика » Финансы » Управление рисками » Арбитраж (экономика)
• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит
• Экономика » Финансы » Управление рисками » Хеджирование
• Экономика » Финансы » Производный финансовый инструмент » Хеджирование to
unbanked corners thus improving financial inclusion, unlike the arbitrage• Экономика » Финансы » Управление рисками » Арбитраж (экономика) of
post GFC stronger bank regulation in the West, which has encouraged
proliferation of hedge• Экономика » Финансы » Управление рисками » Хеджирование
• Экономика » Финансы » Производный финансовый инструмент » Хеджирование funds and shadow banks.
In India also regulation was lighter for NBFCs than for banks since NBFCs are
largely not permitted to raise deposits from customers. Statutory liquidity
ratios, etc., are not imposed but they also do not have advantages of banks
such as access to the RBI’s liquidity windows. Lender of last resort (LOLR)
facilities are provided against the collateral of G-secs. The dominant source
of liquidity for NBFCs is banks with 40-50 per cent share.
After 2014, NBFCs’ credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит creation boomed, especially in consumer and real
estate credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит, making up for slowing bank-lending. NBFCs grew to 20 per cent
of bank balance sheets. Some, however, borrowed short and lent long in 2017
when excess liquidity followed the demonetisation episode. IL&FS, a large
systemic NBFC, had non-transparent governance that hid a stretched balance
sheet. But absence of a LOLR contributed to illiquidity, becoming insolvent in
2018 as aggregate liquidity tightened. After it defaulted, lending to NBFCs
froze. They were in deep trouble with the inability to roll over short term
credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит and funds tied in long-term loans. Banks were refusing to lend to them
and they had no access to LOLR facilities. Systematic spillovers inevitably
followed. Conditions eased as liquidity was expanded in 2019. But after this
episode regulations are being tightened.
Since NBFCs number about 9,000 and vary in size the RBI is following a tiered
approach, which is stricter for the large possibly systematic NBFCs. As they
lose the regulatory advantages without getting facilities banks have, their
business• Экономика » Бизнес models are no longer viable. Some may follow the path of HDFC housing
finance• Экономика » Финансы » Государственные ценные бумаги
• Экономика » Финансы » Управление рисками » Арбитраж (экономика)
• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит
• Экономика » Финансы » Управление рисками » Хеджирование
• Экономика » Финансы » Производный финансовый инструмент » Хеджирование, which merged with its parent bank, thus reducing diversity in
financial services• Экономика » Финансы » Финансовые услуги
• Сфера услуг » Финансовые услуги. Those without supportive parents are exiting wholesale
credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит, going into other businesses or seeking foreign funds.
There is more awareness of risks, after the lessons of the last decade. In
2021, when liquidity was again in excess due to the post-Covid stimulus, only
three NBFCs had large short term commercial paper exposures very different
from 2017. Many hold liquidity in excess of regulatory requirements, raising
their cost of lending.
Regulatory moves to improve corporate governance, loan standards and asset
quality for all led to protests that smaller NBFCs lack expertise and clients
such as MSMEs were not used to rigid reporting requirements and would find it
difficult to comply. But better capital adequacy, disclosure, accounts,
risk-based lending and consumer protection are in NBFCs’ own interest.
In today’s digital age, formalisation will allow NBFCs to gain cheaper credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит
from diverse sources, to innovate responsibly and do well. Production and use
of reliable data is the way forward rather than making excuses for poor
standards. Those with better processes are the ones that will do well.
Adequate buffers encourage appropriate risk-taking. Eventually, even smaller
NBFCs may be able to get a good rating• Рейтинги, based on objective criteria, despite
rating• Рейтинги agencies size bias. Borrowing, as well as lending, can be cash-flow
based if data generating systems are reliable. Diverse sources of funds can
become available. For example, credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит back-ups for lower rated bonds require
good financial information.
Thus, data issues are beyond audit functions and apply to the larger universe
of NBFCs. They can build on India’s digital public infrastructure; help with
leveraging local information to sustain advantages in distribution while
ensuring data privacy; prevent loan pushing.
A self-regulatory organisation can oversee a dynamic process of capacity
building. An industry that suffered from the failure of a member has much to
gain by building in peer monitoring and knowledge sharing to raise and
maintain industry standards.
The role of regulators
While industry angst against regulation often results from a short-term costs
view that ignores long-term benefits, or an inability to understand how
counter-cyclical regulation works, regulation that keeps the overall objective
of furthering inclusive development in mind can evolve towards a better
balance between discipline and support. Industry that sees the one must also
see the other; loosening must follow tightening when there is space.
Since regulators intervene at multiple points, trade-offs between instruments
can be actively utilised. For example, if risk-weights are tightened for areas
where credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит growth is excessive, aggregate liquidity can be kept neutral.
Feedback from industry, when informative and in the aggregate interest, can
help rationalise and reduce compliance costs. The tendency to over-react and
generalise from one episode must be avoided.
To illustrate these principles, consider co-lending, which combines low-cost
bank fund sources with NBFC distribution skills. It should be a win-win since
it builds on natural synergies. It was actively encouraged by regulators as a
way to lower loan costs and expand reach. But it is growing very slowly. With
the recent tightening of risk-weights, bank credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит growth to NBFCs fell from
34.7 per cent in July 2023 to 8.2 per cent in July 2024. While
interconnectedness increases spillover risks it also raises efficiency.
Co-lending is an example of the latter type as it leverages comparative
advantage. Stability must not be at the expense of efficiency.
Conflicting messages are going from the regulator. One message is banks must
limit exposure to NBFCs. But what are the alternatives? Possibilities on the
liability side must be first expanded. Given NBFC heterogeneity, uniform
liquidity access may not be possible. If larger ones are given access
conditional on holding collateralisable securities they may reduce liquidity
hoarding. But more alternatives need to be actively worked on, such as
re-financing mechanisms, availability of ESG finance• Экономика » Финансы » Государственные ценные бумаги
• Экономика » Финансы » Управление рисками » Арбитраж (экономика)
• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит
• Экономика » Финансы » Управление рисками » Хеджирование
• Экономика » Финансы » Производный финансовый инструмент » Хеджирование, specialised credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит from
NABARD, credit• Экономика » Финансы » Финансовые услуги » Кредит
• Сфера услуг » Финансовые услуги » Кредит warranties and other measures to develop bond• Экономика » Финансы » Государственные ценные бумаги markets.
The financial sector has surprised positively after the pandemic. Regulators
made major contributions. NBFCs also demonstrated resilience, flexibility and
learning. But more is required to achieve the financial inclusion necessary
for broad-based sustainable growth.
The writer is Emeritus professor, IGIDR
Comments
SHARE
Copy link
Email• Коммуникации » Интернет-коммуникации » Электронная почта
Facebook• Объект организация » Организации по алфавиту » Организации на Me » Meta (компания) » Facebook
• Объект организация » Организации по алфавиту » Организации на Fa » Facebook
Twitter• Объект организация » Организации по алфавиту » Организации на Tw » Twitter, Inc.
Telegram
LinkedIn
WhatsApp
Reddit
Published on September 16, 2024
