NBFC crisis: Structural issues need to be fixed, palliative will not work: CEA

Chief Economic Adviser K V Subramanian said Thursday there is a need to fix structural issues to take the NBFC sector out of the crisis as palliative will not work. Non-banking financial companies (NBFCs) have been under stress following a series of defaults by IL&FS group companies since September last year.

Immediately after the IL&FS crisis, NBFCs faced severe liquidity crunch as mutual funds (MFs) stopped refinancing the loans of NBFCs. "Some of the structural issues especially in the area of NBFC sector the asset liability mismatch ... the structural problem that needs to be fixed, palliatives are not going to work," he said.

He also said that the taxpayer money should not be used to bail out bad companies. "I have already written and spoken on it before. When we think about it we have to really be careful to ensure we do not perpetuate private profit and socialize loss," he said.

Citing an example of the global financial crisis, he said it was one of the events and the US government bailed out financial institutions but the NBFC crisis cannot be compared with that and there is no need for a bailout. According to the Economic Survey for 2018-19, if the impact of stress in the NBFC sector spills over to this year as well, it may lead to lower credit offtake from NBFCs, which may dampen growth in consumption spending.

It also said that the financial flows to the economy remained constrained because of a decline in the amount of equity finance raised from capital markets and stress in the NBFC sector. "Capital mobilized through public equity issuance declined by 81 percent in 2018-19. Credit growth rate y-oy of the NBFCs has declined from 30 percent in March 2018 to 9 percent in March 2019," the Survey stated.