The problem of NBFCs in India. How the government is taking measures to tackle the problems in NBFCs
There is a decline in consumption which has brought about a decline inside the GDP growth. There isn’t any recession due to the fact the recession approached two-quarters of negative increase. We don’t have a negative increase, we have a five% boom rate. We should go again in September 2018 while the IL&FS scandal happens.
When it occurred people who got caught were debenture holders of the company– pension fund, mutual fund and the creditors from the NBFCs who had lent to IL&FS. 40% of the incremental patron financing final 12 months turned into performance through the NBFCS, not banks. 25 – 30% of the NBFC money turned into coming through funding or Mutual Funds spots.
Mutual Funds used to buy their (NBFCs) papers for 90-a hundred and twenty days and deliver them cash and that they used to roll over. Second, they used to region bonds or mutual fund spots in the market. 45-50% of the NBFC financing changed into coming from Mutual budget at that time. But, because mutual budgets like DSP, HDFC and others have been hit by the IL&FS scam, they stopped their funding to the NBFC. When they stopped investment, the NBFCs needed to release the money to pay back anything that matured.
The publicity to the NBFC sector came down, as a result, IL&FS came about inside the quarter of October-Dec, 2018 noticed a decline in intake and decline in its financing and subsequently, the GDP growth rate in Jan-March got down to 5.6 %. It noticed the effect there. In October, November and December, late former finance minister Arun Jaitley was no longer well, so there was not a lot of action happening. RBI now is not even thinking about it as it has undergone some changes.
In January, February and March we had a new Finance Minister who turned into busy with the finances. Then the authorities went to election mode. In April, May and June (2019) nothing came about, and after the NDA2 government was shaped they had to make the finances and then the Kashmir problem took place, which saved the government occupied further. We had no motion from the authorities all this while.
The market representatives went to satisfy the government to speak to it about the liquidity crisis they are faced with all the time. But, the RBI went on lowering interest rates, pronouncing that there was liquidity in the banking system.
The hassle was that lending to purchasers changed into no longer completed with the aid of the banks, it changed into finished by using the NBFCs who from September final year till now (2019) have withdrawn Rs 3 lakh crore from the marketplace, which means approximately Rs 1.five to two lakh crore has been paid again by them closer to their liabilities.
Reliance Capital itself paid lower back Rs 40,000 crore and DHFL additionally paid returned Rs 40,000 crore and something money they had been lending they were no longer getting returned to lend further. So there was a liquidity squeeze within the market.
Now how did the liquidity squeeze show up itself? It manifested itself within the lack of purchase of cars and autos, purchase of actual estate and construction via actual estate companies. Around 95% of automobiles may additionally have been financed through the NBFCs or by using agents.
What has been the impact on the auto quarter?
According to a Kotak Mahindra report, the total auto and vehicle sales in the country is about Rs 5 lakh crores. The monthly sales can be around Rs 40,000 crore. Now a 20�cline within the Rs 5 lakh crore sales figure might sum up to approximately Rs 1 lakh crore which is financing.
Hence, there is negative growth. Although, around Rs 60,000 crore financing has come returned, out of which dealership may be around Rs 10,000 to Rs 15,000 crore and the NBFC area has built a Rs 1 lakh crore liquidity in its balance sheet. Liquidity inside the stability sheet is the way the NBFCs preserve the money to pay lower back their liabilities.
They aren’t lending but they’re paying again their liabilities. And since they’re paying again their liabilities, there is a problem. Since the NBFCs are constructing the liquidity to pay back their liabilities so that they do not default, the money isn’t always going to the marketplace.
What should be done?
The government has to come out with a scheme in which the NBFCs can sell their belongings and lift liquidity however if they promote goods, their balance will decrease and they may have to put up margins. The better element is to discover that are the coolest NBFCs to which banks can provide good credit score strains to lend, in particular to the car and actual estate sector wherein they could place up 25% of their money and get 75% in return. The banks can explore receivables so that the money that comes can be used to pay back the financial institution loans and now not diverted.
We want liquidity to be pumped up at the point of lending that’s an NBFC. Now, that is not taking place as the SBI Chairman Rajnish Kumar stated very truly that he has Rs 1 lakh crore surplus money which he isn’t geared up to lend. However, the hassle is that he can’t lend. He is scared to do so due to the fact he has to lend to the NBFCs only and has to find out which of them to lend to and give the strains of credit to. That’s the way it needs to be done.
What we see is a liquidity squeeze within the economic system. Consumption has come down because of this. There isn’t always sufficient liquidity within the system. At present, the entire financial institution lending within the gadget is Rs 97 lakh crore out of which the full NBFC book is Rs 24 lakh crore.
The RBI has to monitor the whole lending which includes NBFCs aside from the banks on a fortnightly basis. The apex bank simplest monitors banks currently. It must additionally oversee the NBFCs and take a look at the gadget liquidity which includes both NBFCs and banks so that the borrowings can choose up in the economy. This, however, is a challenge the government has to address urgently. Unless the NBFCs are given the strains of credit score, they’re no longer going to pick up the pace.
Talking about the Iron & Steel industry, the automobile and actual estate sectors are the largest purchasers of constructing fabric like cement that is used by a whole lot of organizations and creates a variety of jobs. Hence, jobs could also come down in other sectors of the financial system.
The scenario is such that now even the intake of the FMCG products is coming down but that’s no longer a legitimate argument because it is seasonal. Soumya Kanti, Chief Economic Advisor, SBI has written an article wherein he has given information to explain all this. However, the bigger hassle is the big intake gadgets and this is where the government has to apply its mind.
But first, the government needs to clear up the liquidity trouble. Secondly, what it has to do is to guarantee the industries that it is not going to surprise them anymore. Industries cannot take any form of a surprise anymore. They were shocked with demonetisation, GST, RERA and IBC and now they were given the NBFC liquidity shock. Most industries are giving up as they do not know what to do as no person is being attentive to them.
On the pinnacle of all this is tax terrorism which is a very huge aspect due to the fact in the ultimate five years, the tax disputes in NDA 1 have doubled around Rs 3.five lakh crore to 6 lakh crore. Tax authorities are dropping 80% of the instances at the attraction stage which can be all determined to be bogus claims. Why bogus claims due to the fact the goals are too high. The authorities could not meet the target closing yr and the goal for this yr could be very high.
When the economic system is developing at 8% together with inflation, waiting for the tax collection to head up through 16-17% is difficult. Hence, the tax authorities go in advance and extort humans as they are under stress to gain their objectives.
The Central Board of Direct Taxes (CBDT) terrorises tax officers who then flip to the citizens. This is turning into a massive problem everywhere. Refunds inside the tax device aren’t coming through, GST refunds aren’t coming and on top of that everybody wants to meet their objectives.