Today the banking sector is
eye-catching sector in INDIA. We are facing significant challenges in financial
sector. From the last decades we have seen the challenges in manufacturing and
industries that impact the financial sector.
The NBFCs in India have gone
through a remarkable evolution over the past few years. They are recognized as
one of the critically important components of the financial system and have
shown consistent growth year after year. NBFCs play a major role in the core
expansion of infrastructure, transport, employment generation, wealth creation
opportunities, and financial support for economically weaker sections; thereby,
making a significant contribution towards the overall development of the
country.
With the demonetisation more
money pumped into the system. It was a first instance where liquid money first
introduced to the banking sector then mutual fund and insurance sector
respectively. After that it finally came to the NBFC and HFC’S. Over the last 2
quarters currency circulation were rapidly increasing but along with that banks
were charging higher interest for the credit services hence liquidity
conditions were reasonably tight. So the market situation is like that more
money is going into non-liquid assets and which challenges the financial
sector.
NBFC crisis:
The crisis in India’s NBFCs,
triggered by the IL&FS debacle, has taken centre stage in the economic
debate even as the tussle between the Union government and the Reserve Bank of
India (RBI) on a host of issues, including refinancing for NBFCs, is heading
for a climactic showdown.
Until just about a decade
ago, Indians thought of EMIs for homes and vehicles, but in the past five
years, more and more have become cheerful participants in a deepening retail
economy to buy jewellery, smartphones, luxury handbags, air tickets, furniture,
etc. and a lot of that boom has been funded by NBFCs big and small. If the
price looks steep for a straight purchase, an NBFC will finance it for you. You
just pay an EMI often interest-free. NBFCs aren’t as strict about
creditworthiness and documentation before financing you. They aren’t as
stringent as banks.
There are over 11,000 NBFCs
registered with the RBI across the country, which has increased India’s
consumer economy as retailers across sectors have latched onto the EMI
bandwagon to lure the consumer. After IL&FS defaulted on payments to
lenders and triggered panic in the markets, there is now speculation that the
entire sector might cave in unless desperate measures are taken to keep it
afloat.
How the crisis unfolded:
Like every other business,
NBFCs have short-term and long-term cash requirements. They take long-term
loans from banks as well as institutions by raising debentures. These loans
mature, and additional loan disbursements need to take place. As part of their
regular business, these NBFCs keep borrowing short-term money through
commercial papers of three or six months from mutual
funds. With the IL&FS default, some mutual funds were left cash-strapped.
With the stock market going down, there have been more withdrawals from mutual
funds.
The IL&FS fiasco has made
investors more careful. There's no denying the fact that, NBFCs are growing at
a fast clip and they already seem to pose a threat to the conventional methods
of banking. There are more players whose risk management and fundamental skills
will not be as sharp and face challenges.
Other ways for NBFC to
sustain in the market is through consolidation and combination.
But, here are few points that we need to consider
before extrapolating things:
The concept of NBFCs is still
new in India and the industry is yet to see difficult times. Will they be able
to absorb the shockwaves of a recession? That remains to be seen.
There's a cutthroat
competition among various number of players which makes the industry seemingly
unorganized.
So, it is too early to say
anything. The answer lies in the 'future'.
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