India Finance Report Overview
Source: India Finance Report: A warning against repeating past mistakes (The Indian Express, November 10, 2023)
- Positive Trends in Non-Bank Financial Companies: The first India Finance Report by the Centre for Advanced Financial Research and Learning (CAFRAL) reviews the non-bank financial companies (NBFCs) sector, often known as shadow banking. The report shows sector improvements post the 2018 liquidity crunch and the Covid pandemic.
- Increased Capital Ratios: NBFCs’ capital to risk-weighted assets ratio (CRAR) has grown. It was above the required 15 percent, rising to 27.6 percent in 2022-23 from 22.9 percent in 2019-2020.
- Decline in Non-Performing Assets: The report also highlights a reduction in non-performing assets (NPAs). Both gross and net NPA ratios have shown a downward trend.
NBFC Sector’s Health Improves
- Boost in Capital Position: After facing challenging times such as the 2018 liquidity crisis and the COVID pandemic, the Non-Banking Financial Companies (NBFCs) have shown significant improvement. Their capital position has strengthened notably. According to 2022-23 data, the capital to risk-weighted assets ratio (CRAR) was much higher than required, at 27.6 percent, up from 22.9 percent in 2019-2020.
- Decline in Non-Performing Assets: The asset quality of NBFCs has also enhanced. There is a downward trend in both gross and net non-performing asset (NPA) ratios, indicating healthier balance sheets.
Emergence of New Risks
- Increased Bank Financing: Recent years have seen banks financing NBFCs more frequently. This trend could pose a threat of systemic contagion, meaning problems could spread across the financial system. Experts stress the importance of stronger preventive measures to avoid widespread economic repercussions.
- Systemic Risks in Tranquil Times: The CAFRAL report emphasizes that even when financial indicators seem stable, systemic risks can accumulate. Quiet financial periods often lead to greater risks being taken. When economic shocks occur, these risks can cause widespread problems, like forced selling of assets at low prices among different firms during a crisis.
Economic Policy Considerations
- Monetary Policy Impact: Two key periods have shaped the current economic landscape. Initially, a relaxed monetary policy was established to support growth and protect businesses during the pandemic. This phase quickly shifted to a stricter policy in response to rising inflation rates. Such rapid changes in monetary policy can take businesses by surprise.
- Importance of the NBFC Sector: The significance of the Non-Banking Financial Companies (NBFCs) in India’s economic structure cannot be overstated. After the 2008 financial crisis, NBFCs proved vital, stepping in to provide credit when traditional banks were dealing with non-performing assets (NPAs). To avoid past errors, regulators must be vigilant in maintaining the stability of this sector.