RBI checks on fragility of NBFCs

In a bid to boost Indian economy growth to US$5 trillion a year, the Reserve Bank of India’s (RBI) focus will be to continue unlocking the entrepreneurial energies.

“The policy focus will continue to be on unlocking their entrepreneurial energies and set India firmly on the trajectory towards its aspirations of becoming a US$5 trillion economy within the next five years,” said Governor Shaktikanta Das said in Singapore on 23 Aug 2019.

As the financial sector repairs and emerge out of the balance sheet stress, a speedy revival aggregate demand in the economy assumes vital importance in order to reinvigorate, he said.

“Stimulating demand is currently the overriding priority of both the Government and RBI,” Press Trust of India quoted Das as saying.

“Some structural reforms are also required, and I am happy to note that some structural reforms are on the anvil,” he told some 200 business executives from leading corporations based in Singapore.

Das pointed out “with the election behind us and the budget for the remaining part of the fiscal year announced, government spending would see a boost, which will have salutary impact on the economy.”

He stressed that the slight slowdown in the last quarter was a temporary one and that the economy is likely to end the fiscal year with a higher growth rate close to 7%.

Das was on a two-day visit to Singapore (22-23 Aug 2019) during which he met Singapore Deputy Prime Minister Heng Swee Keat, his counterpart Monetary Authority of Singapore’s managing director Ravi Menon and top leaders of Singapore’s financial sector and global financial companies.

Efficient and well-functioning financial sector and deep and vibrant financial markets contribute to economic prosperity by mobilizing savings and allocating them efficiently to the most productive investment opportunities, facilitating trading, diversification and management risk as well as enable the exchange of goods and services, he underlined.

In India, the household savings are the principle livable resources in the economy, said Das, pointing out that of the total household savings of 17.2 per cent of GDP in 2017-18, only 6.6 per cent were in the form of net financial savings.

“Greater financializing of the savings can increase the pool of domestic resources and it can substantially ease financial pressure on the balance of payment of the country,” Press Trust of India quoted Das on tapping domestic savings.

The financial system comprising institutions and markets has a key role in bringing these resources towards the productive sector, he pointed out.

Elaborating on RBI’s 35 bps repo rate cuts on 7 August, he said the banks have reduced lending rates for new loans by about 29 bps as a follow up since then.

Normally, it takes about three quarters for the policy rate transmission to happen. “But now it is happening faster and our interaction with the banks shows that we can expect faster and higher level of monetary policy transmission passing the benefits of the rate cuts to new loans.”

Das said RBI has interacted with banks’ chiefs and the central bank would like to see market-based rates, leading to a situation where banks ensure faster and higher monetary transmissions and reduce the interest rates for new loans.

During his more than one-hour interaction with business leaders, Das shared efforts being made to rebuild the financial sector and recoup the stressed Non-Banking Financing Companies (NBFCs).

He highlighted several measures announced in the Union Budget in July to strengthen the NBFC sector.

He also mentioned that while some NBFCs had not done well, there were others that had good balance sheets and were performing well.

RBI, he said, was monitoring the key NBFCs and Housing Finance Companies that account for bulk of the credit from NBFCs and were systematically important.

“We have a fairly reasonable grip of where they (these entities) stand. When we notice any kind of weakness, fragility in NBFCs, we are interacting with their promoters and nudging them to find market-based solutions to the stressed situation,” he said.

“It is our endeavor to ensure that we do not experience failure of another systematically important large NBFC. This is something we are working and monitoring on a day-to-day basis.”

He also highlighted that the banking sector was turning around and governance reforms were being implemented. He highlighted that gross NPAs come down from 11.8% to 9.3% and are likely to go down to further by the end of the current fiscal.

The fresh infusion of Rs.70,000 crores by the Government would raise the ability of the public sector banks to expanding lending, especially to the MSME sector. fiinews.com