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Economy
Mahesh

10/11/23 07:04 AM IST

India Finance Report

In News
  • The first edition of the India Finance Report published by the Centre for Advanced Financial Research and Learning (CAFRAL),has taken stock of India’s non-bank financial companies sector — commonly called the shadow banking sector — and pointed out both the ongoing improvements and emerging risks.
Major findings
  • The CAFRAL report finds that after the liquidity crisis of 2018 and the Covid pandemic, the NBFC sector has improved, along all dimensions — capital position, asset quality, and profitability.
  • For instance, as against the stipulated norm of 15 per cent of the capital to risk-weighted assets ratio (CRAR), in 2022-23, NBFCs witnessed a notable improvement with the CRAR rising to 27.6 per cent from 22.9 per cent in 2019-2020. Similarly, gross and net non-performing asset (NPA) ratios continue trending downwards.
  • The study notes  that in the past few years, bank financing for NBFCs has begun to rise again.
  • The risk which arises due to externalities that individual firms do not take into account in their decision-making process, and an unravelling of which can have deleterious effects on the real economy.
  • It underlines that systemic risks build up in periods of tranquil financial conditions due to increased risk-taking, and tend to aggravate the effect of a shock through negative spillovers such as fire sales across firms during a crisis.
There are two reasons both the RBI and the government should take this report’s findings seriously.
  • One, the global, as well as the Indian, economy has just witnessed two periods of stark contrast in terms of monetary policy.
  • First, there was an extremely loose monetary policy, aimed at protecting economic growth and businesses during the pandemic.
  • This was immediately followed by an equally sharp contraction in monetary stance following the sudden and sharp rise in inflation.
  • The back-to-back monetary shocks are catching businesses off-guard.
  • Two, the events of the past 15 years have shown that the health of India’s NBFC sector is crucial to sustaining India’s economic growth, especially through millions of MSMEs.
  • In the decade after the Global Financial Crisis of 2008, the NBFCs acted like shock absorbers to the Indian economy — providing credit when formal banks were struggling with NPAs. Regulators must ensure that past mistakes are not repeated.
Source- The Hindu

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