The Reserve Bank of India (RBI) will strengthen the asset liability framework for non-banking financial companies (NBFCs) and harmonise it across different categories, RBI governor Shaktikanta Das said at an investor roundtable on the first day of Vibrant Gujarat 2019 summit, even as he flagged persistent core inflation as a sticking point for inflation assessment.
“. . .the Reserve Bank has relaxed the norms for NBFCs to securitize their loan books. In addition, banks have been allowed to provide partial credit enhancement to bonds issued by the systemically important non-deposit-taking NBFCs and housing finance companies. This measure will enhance credit rating of bonds and enable the companies to access funds from the bond market on improved terms," Das said.
The health of NBFCs and the regulatory framework that governs them has attained vital significance in the aftermath of more than one debt default at Infrastructure Leasing & Financial Services Ltd (IL&FS). The group’s debt stands in excess of ₹90,000 crore and it is unable to meet any debt obligation.
The government has appointed a new IL&FS board, led by Kotak Mahindra Bankpromoter Uday Kotak, to oversee IL&FS’s restructuring and suggest remedial measures.
There are several provident and pension funds of salaried people who are holding bonds issued by IL&FS and these funds now face the spectre of losing billions of rupees of investor money.
Speaking on inflation, Das said headline inflation has moderated significantly in recent years, but given that its various components—food, fuel, and inflation excluding these two—were showing wide divergences, inflation assessment faced challenges.
“While food inflation has turned negative since October 2018 and fuel inflation has been highly volatile, inflation excluding food and fuel remains sticky at close to 6%. Such wide divergences and large volatilities in inflation across major groups pose challenges for inflation assessment. Balancing the objectives of inflation and growth under a flexible inflation-targeting framework would warrant careful analysis of every new data," Das said.
The annual retail inflation rate dropped to an 18-month low of 2.19% in December 2018 while wholesale inflation rate eased to an eight-month low of 3.8%. Consumer food price index was -2.51% in December from -2.61% in November. Wholesale inflation in food rose to 0.07% as against a -1.96% in November 2018.
Core inflation, minus food and fuel, was at 5.7%—a point that Das referred to—as healthcare and education costs shot up. Thus, as Shaktikanta pointed out, assessing and tackling inflation remains a challenge for the central bank.
“...The foremost priority is to preserve domestic macroeconomic and financial stability, especially in a global environment that is clouded by high uncertainty. Not only downward risks to global growth, trade and investment have risen, the spillover effects on emerging markets due to increase in global interest rates could also be profound," he said.
Das said there was thus a need to brace for any sudden bout of global financial market turbulence that domestic economy and financial markets might face.
Speaking on the asset quality of Indian banks that remains poor, particularly that of public sector banks, Das said there was a need for continued vigil on the asset quality of banks as well as resolution of stressed assets with a focus on implementation of the new resolution framework. It will remain critical to ensure that further slippages are contained, he said.