Opinion | Liquidity buffers for our shadow lenders2 min read . Updated: 28 May 2019, 11:18 PM IST
RBI’s draft guidelines for NBFCs on liquidity risk may safeguard them from asset-liability mismatches in the future, but further action is needed to address their current problems
A familiar story seems to be playing out in the Indian financial sector—a crisis is brewing in one part of the inter-connected system, and the regulator, ironically disparaged by the industry for not allowing a free rein, is now being invoked to bail out stuck players. The regulator, the Reserve Bank of India (RBI), has responded but its reaction is unlikely to help players immediately. Sadly, that’s the way it has been for this industry for a while. Cut to the 2008 financial crisis, and its post-mortem, which focused multiple searchlights on “shadow banks"; remedial measures thereafter tried to constrain these entities through enhanced regulation and reduced operational freedom. In India, shadow banks are known as non-banking financial companies (NBFCs), which, barring the odd slip-up, have been useful in expanding the footprint of formal finance. Therefore, while India did agree with global regulators to circumscribe shadow banks, or NBFCs, the reality has been slightly different. Their regulation has been calibrated over time, specifically after the mid-1990s when a firm called CRB Finance collapsed and failed to pay out money to small depositors. Since then, the intensity of RBI’s regulations has varied depending on the prevailing circumstances: An imminent crisis, global alignments, government pressure or turf wars with other regulators. It appears RBI is once again being bullied to not only relax its regulatory regime, but also throw a lifeline to them. The demand—primarily from the industry and some disparate voices, including the government think tank, NITI Aayog—is to provide a special credit window. NBFCs have been caught in a squeeze ever since Infrastructure Leasing and Financial Services (IL&FS) defaulted on debt repayments; unable to refinance maturing debt, many of them stare at rating downgrades and possible defaults.
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