Tackling NBFC, credit concerns key challenges before new government

The giant bank consolidation exercise announced in 2015 needs to quicken its pulse, while privatisation (reducing government’s stake under 52 per cent in state-run banks) remains a dead duck. 

Published: 25th May 2019 10:46 AM  |   Last Updated: 25th May 2019 10:46 AM   |  A+A-

RBI

Reserve Bank of India (File Photo | PTI)

Express News Service

HYDERABAD: The new government will probably pick up from where it left off its financial sector reforms discourse, while the trouble brewing among NBFCs, besides slowing bank deposits, will need fresh attention from the Ministry of Finance. 

The clean-up of banks’ bad loans, which started during the NDA government’s first term, is almost complete, though public sector banks are still not out of the woods with a handful of them stuck in the RBI’s Prompt Correction Action framework. The giant bank consolidation exercise announced in 2015 needs to quicken its pulse, while privatisation (reducing government’s stake under 52 per cent in state-run banks) remains a dead duck. 

“We need to really be bold in our deep reforms of the financial sector, of the real and social infrastructure, remove a whole host of bottlenecks in different segments of the economy and unleash the economy for significant growth in the years to come. We need to move to double-digit growth,” said Uday Kotak, MD and CEO, Kotak Mahindra Bank. 

According to Gautam Chhaochharia and Tanvee Gupta Jain of BS Securities India, resolving issues in the financial system such as NBFC stress, and catalysing credit growth for banks remain a big hope for a revival of growth. 

“Our scenarios oscillate between a mix of big bang vs incremental reform and staggered vs a one-time RBI dividend payout,” they noted. 

NBFCs, which account for over a third of all new loans, are struggling with an asset-liability mismatch. They borrow from banks and mutual funds; but with cash flows drying up, some players are unable to repay. Banks too are wary of lending and are insisting on higher returns, while the RBI ruled out opening of a special liquidity window for NBFCs to bail them out of the crisis. Instead, it will soon unveil a broad liquidity framework for NBFCs, which, in the long-run, will reform the sector at the cost of short-term pains. 

Meanwhile, brokerage Edelweiss Securities anticipates a shift towards reviving the business cycle, unclogging the financial system and building risk and investment appetite. “This is imperative since the investment cycle is stuck, asset quality is still a challenge, the funding cycle is mired in liquidity issues and consumption has been trending down,” the brokerage firm reasoned.
 

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