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Business News/ Industry / Banking/  Banks need to take larger haircuts to resolve stress in some NBFCs, says Shaktikanta Das

Banks need to take larger haircuts to resolve stress in some NBFCs, says Shaktikanta Das

Shaktikanta Das said that the resolution process for the shadow banks will have to be market linked and for this, banks and other lenders will have a major role to play
  • Das said that the Finance Bill has given the RBI powers over NBFCs but it would prefer that the resolution of stress be through market mechanisms
  • A file photo of Shaktikanta Das, governor RBI (Photo: Mint)Premium
    A file photo of Shaktikanta Das, governor RBI (Photo: Mint)

    MUMBAI : Lenders need to take larger haircuts in order to resolve stress in non-banking financial companies (NBFCs) having governance issues, said Reserve Bank of India governor Shaktikanta Das on Thursday.

    Speaking at the Bloomberg India Economic Forum, Das said that the resolution process for non-banks will have to be market linked and, in this, banks and other lenders will have a major role to play.

    “In NBFCs, where there are major governance issues, (banks) need to take a larger haircut. There are business failures, but there is also an element of administrative or governance lapses. So, banks will have to take a balanced call," said Das, adding that essentially, the market mechanism would include the primary proactive role to be played by the promoters, lenders and other stakeholders.

    He said the Finance Bill has given the central bank powers over NBFCs, but preferably resolution of stressed assets should be done through market mechanisms.

    “These would mean that current promoters go for a stake sale or bring new money into the setup. There has to be inflow of resources either by stake sale, or by bringing new promoters or by securitization of assets," he added.

    Non-bank lenders have seen their source of funds suddenly dry up after a series of defaults by the Infrastructure Leasing and Financial Services Ltd (IL&FS), which triggered a liquidity crisis in the financial sector. Banks and mutual funds reduced lending to NBFCs and housing finance companies (HFCs), creating a cash crunch and forcing the shadow lenders to sell assets and cut back on new loans.

    The RBI governor also said that the merger of 10 public sector banks into four, will have to be non-disruptive. He said while the boards of the concerned banks were yet to approve the mergers, and as and when it comes to the central bank for approval, the mergers should not disrupt the flow of credit in the economy.

    “This is also a priority for us and the Reserve Bank will definitely take necessary measures, to ensure that this whole process of transition takes place in a non-disruptive manner. But let me clarify, what I am saying is that the individual boards of various banks are yet to take their decisions," said Das.

    Speaking about the fiscal position, Das said the government has, by and large, remained prudent.

    “They’ve not announced any counter-cyclical measures, which will need fiscal expansion. Most of these things announced are non-fiscal. I think the government’s fiscal space is itself very limited," he said, adding that there was little space for fiscal expansion.

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    Shayan Ghosh
    Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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    Published: 19 Sep 2019, 08:57 PM IST
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