By Vishwanath Nair
During the recent crisis in the non-banking finance sector, the government found multiple gaps, which affected their ability to take action, said Economic Affairs Secretary Subhash Chandra Garg.
Speaking at an event organised by the Confederation of Indian Industry on Saturday, Garg said that the government found gaps in the way NBFCs were regulated, the way data regarding the sector was collected, and the way the information was managed.
The data collected was rather poor. Forget about daily data points, which is needed, we didn’t even have monthly data regarding the performance of NBFCs. We are working with the RBI (Reserve Bank of India) to create ways to do this better. Some strengthening of institutions needs to be done in this space.
Subhash Chandra Garg, Economic Affairs Secretary
In October, after the corporate bond market found itself in a crisis following a string of defaults by Infrastructure Leasing & Financial Services Ltd., the RBI and the government received some criticism for not being able to manage the issue sooner.
According to the Economic Affairs Secretary, to better deal with the funding crunch facing the NBFC industry, financial instruments that encourage retail investors to invest in non-banks needs to be developed. Garg also said that there was a need to ease some of the friction in regulations which do not allow more investments by domestic and international long-term funds like pension funds.
Speaking at the same event, Uday Kotak, vice chairman and managing director at Kotak Mahindra Bank Ltd. said that the NBFC sector has been through a lot over the last few decades, but had managed to survive. However, it was essential for the NBFC sector to clean up its act and be more careful about institutional governance, quid pro quo transactions and rerouting of funds.
Here are the other highlights from what Uday Kotak had to say:
- A security, unlike a public deposit, drops in value due to a credit event. This nuance must be made.
- We cannot have market instruments with a socialistic intention that everything will be alright.
- There has been a concentration on the liabilities side of the NBFCs because mutual funds were allowed to invest more in their papers.
- Closer coordination between regulatory arms should happen in consultation with the government.
- Need significantly better commitment towards developing the financial sector.
Infrastructure Financing Push
In his speech, the Economic Affairs Secretary also stressed the need for the NBFC sector to seek out more avenues of growth, which can help push the country’s economic growth. Infrastructure finance is one such sector where private sector NBFCs could do more. Garg pointed out that out of eight infrastructure financing NBFCs in the country, five were promoted by the government.
Apart from infrastructure financing, NBFCs should also focus on providing equity to Indian companies. For this, NBFCs could become a channel for long-term funds, Garg said.