Chief Economic Advisor Krishnamurthy Subramanian Wednesday said the issue of solvency is at the core of the problems afflicting the non-bank lenders. Non-Banking Finance Companies (NBFCs), which account for a fifth of the overall lending in the economy, have been facing headwinds since late August 2018.
"What is basically appearing as liquidity (problems) is related to solvency," Subramanian told reporters on the sidelines of the Dun & Bradstreet award event here. He said the "crux" of the problem is the asset liability mismatch, where lending institutions borrowed short for creating long term assets. In recent months, many NBFCs have been forced to exit non-core businesses and sell down future receivables, taking securitisation volumes to an all-time high in fiscal year 2018-19. A slew of measures have been taken by the government and the Reserve Bank to address the troubles, which started after the crisis at infra lender IL&FS.
Rising interest rates also accentuated the asset liability mismatch issue. On Prime Minister Narendra Modi-led government's new term, Subramanian said the focus should be on what he described as the "4 Ls" of Land, Labour, Lend and Law in order to take the economy to greater heights. "What we have to focus on is to ensure that the private sector becomes competitive, especially the factors of production -- Land, Labour and Capital," he said, adding doing so can help ensure that the "animal spirits" in the economy continue.
For a market economy, he said the legal framework forms the bedrock for all the transactions and has to be made stronger. Drawing from Hindu mythology, he termed the Insolvency and Bankruptcy Code (IBC) as "Shiva" or the "creative destructor" which helps in passing sick units to more focused owners who have the right wherewithal to take a business ahead.
(With inputs from agencies.)