NEW DELHI: The Union government has no plan to dole out any fresh rescue package for the ailing Non-Banking Financial Companies (NBFC) other than the support it announced for public sector banks to buy some of their assets.
Top finance ministry officials said despite pressure from the corporate sector as well as sections of the government, which want a new bailout package for NBFCs, many of which have had spectacular collapses, the thinking is that bailouts to every shadow bank would not only require a huge amount of money but also set a bad precedent. “The rule of a successful market economy is to let weak corporations die out. Only those NBFCs that are considered ‘too big to die’ such as IL&FS will get rescue packages,” the official said.
The IL&FS debt defaults have already claimed a big victim in Café Coffee Day chain founder VG Sidhartha, who has gone missing after dues to him from IL&FS got stuck, resulting in a debt crisis for the entrepreneur whose knock-on effect saw him being hounded by creditors, investors and taxmen.
The Union Budget had said the government will provide partial guarantees amounting to Rs 1 lakh crore this fiscal to public sector banks in order to buy high-rated pooled assets of financially sound NBFCs. The guarantee would be in the form of a one-time six months’ partial credit guarantee for their first loss of up to 10 per cent.
However, many have since then argued that to solve the shadow banking crisis, the government or the Reserve Bank needs to do much more. Among others, Mumbai-based tycoon Anil Ambani had argued that “full life support” should be given to save the NBFC sector, as the contagion effect on the entire economy was visible.
Moody’s Investors Service on Monday cautioned that stress among non-banking financial institutions will continue to constrain economic growth.
The rationale
According top financial ministry officials, the thinking behind the decision to not provide a rescue package to NBFCs is that bailouts to every shadow bank will not only require huge amount of money, but will also set a bad precendent