The financial sector is going through a phase of stress, which needs interventions in appropriate measure to ensure that the sector continues to play the financing role that it has been for the India growth story to remain uninhibited. CII has had wide consultations with leaders from the various segments of the financial sector and has come out with a detailed paper with recommendations, which are primarily for the regulator, said Mr Chandrajit Banerjee, Director General, CII.
In its set of recommendations, CII has said that the Financial Sector in India over the last few years has become an integrated system with players like NBFCs, Banks, HFCs, Mutual Funds amongst others becoming symbiotically inter-connected and these no longer exist in isolation. Any significant impact on one segment is bound to have a ripple effect in the entire system. The sector has become much more broad-based compared to even five years back.
Outlining the problem facing the sector, CII said in its release that systemic imbalances have crept into the sector.
Currently, Mutual Funds have sectoral limit on investment in NBFCs upto 25% of the AUM of the particular scheme and HFCs can be additional 15%. Considering the inherent risk profile of NBFCs and HFCs, such investment norms are increasing the risk exposure of mutual funds. Therefore, CII's first recommendation is for the RBI and SEBI to come out with a road-map to reduce the exposure of Mutual funds to NBFCs and HFCs from 40% to 25% in graded tranches.
CII also pointed out that NBFCs and Housing Finance Companies (HFCs) are suffering from Asset-Liability Mismatches (ALM) as they had borrowed short but are having to lend long. This could set off a chain of problems, since NBFCs have borrowed from MFs and Banks.
In a worst-case scenario, this could lead to a run on mutual funds and defaults in the NBFC sector.
In the current scenario of lack of liquidity, particularly of short term Commercial Papers, it is leading to a contagion effect. Redemption pressure on Mutual Funds has increased and credit to NBFCs is drying out. The MFs may not opt for roll-over of the papers because of the risk perceived in NBFCs. Also, if the roll over happens it will be at a higher yield for NBFCs.
The RBI is required to intervene in the interest of the entire financial sector, CII said in the release.
The added issue is that 11 public sector banks have been put under prompt corrective action (PCA) which has further reduced the credit flow to the real sector. While there is a curb on lending, these banks have been receiving deposits which is getting routed only to repo market and not to the real sector further adding to the liquidity crunch in the market. Here again, there is action required from the RBI.
As per CII, the immediate concern is to alleviate investor and depositor's concerns and such steps need to be taken with the intention to provide stability and certainty, as well as tackling the liquidity shortages.
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