5th March 2025 (11 Topics)
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IMF’s Warning on NBFC Exposure
Context
The International Monetary Fund (IMF), in its Financial Sector Assessment Programme (FSAP) for India, has warned that Non-Banking Financial Companies (NBFCs), especially large state-owned infrastructure financing firms, have significantly increased their exposure to the power and infrastructure sectors.
What’s the issue?
- While banks have reduced direct exposure to these sectors after the 2016 banking crisis, NBFCs have taken on a larger role, increasing systemic risks.
- If major NBFCs face distress, it could spill over to banks, corporate bond markets, and mutual funds, causing widespread financial instability.
- IMF’s Key Recommendations
- Financial Stability Over Social Goals: IMF suggests prioritizing financial stability over developmental goals to avoid future crises.
- Regulating State-Owned NBFCs: Large state-owned NBFCs should have the same regulations as private NBFCs.
- Strengthening Banks’ Capital Base: Some public sector banks (PSBs) need more capital to support lending in crisis situations.
- Enhancing Crisis-Response Mechanisms: The RBI should prepare liquidity policies for potential systemic shocks in NBFCs.
- Policy Alignment with Global Standards: India should implement:
- Risk-based supervision of insurers
- Pillar-2 capital charges for banks
- International Financial Reporting Standards (IFRS)
- Better oversight of financial conglomerates
Impact on India’s Financial Sector
- The IMF considers India’s financial system systemically important globally, making these recommendations crucial for maintaining stability.
- If ignored, an NBFC crisis could trigger a domino effect, affecting banks, corporate lending, and investment markets.
What Are NBFCs?
|
PYQQ: With reference to the Non-banking Financial Companies (NBFCs) in India, consider the following statements: (2010)
Which of the statements given is/are correct?
Solution: (b) |
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