NBFC health control to limit loans

Mumbai: The Economic Survey has suggested that policy makers should use a dynamic health index, which captures liquidity risks in non-bank financial companies (NBFC), to avoid financial fragility in the sector. He added that the regulator could use the score to limit the amount that other institutions could borrow to reduce systemic risks.

The health monitoring index would take into account the risk of refinancing, which would be determined by the degree of dependence on short-term financing and the strength of the NBFC balance.

At the most fundamental level, the root cause of the crisis in the sector could be attributed to the excessive dependence of NBFCs in the short-term wholesale financing market. A would have identified fragility in the sector even during its high growth phase. Overall, it was found that the health score for the housing finance sector exhibited a downward trend after 2014.

After growing very fast in 2017-18 and the first half of 2018-19, the NBFC sector has decelerated sharply since then. The growth of NBFC loans decreased from 27.6% in September 2018 and from 21.6% in December 2018 to 9.9% at the end of September 2019.

The balance of the NBFC sector grew by 17.9% from Rs 26.2 lakh crore to Rs 30.9 lakh crore during 2018-19. This growth added to a 21.3% growth recorded during 2017-18 despite concerns about NBFCs. The third quarter of 2018-19 witnessed liquidity stress. The cost of funds for NBFCs decreased in March 2019 and even more in September 2019, as reflected in the three-month CP discount rate.