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Plan likely to give NBFCs more lending room

India is mulling a plan akin to US' Troubled Asset Relief Program to give NBFCs some headroom to lend.

, ET Bureau|
Last Updated: Jan 20, 2020, 05.30 PM IST
A study by ratings agency Crisil estimated that the NBFC credit pool rose only 3% in the first half of the year against nearly 18% in the previous two years.
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NEW DELHI: The government is debating a mechanism to get credit flowing by providing support to non-banking finance companies (NBFCs) amid a growing realisation that financial sector stress has impacted demand and stalled economic recovery.

The options that have been deliberated ahead of the February 1 budget include a plan akin to the Troubled Asset Relief Program (TARP) that the US put in place after the subprime mortgage crisis that sparked the financial crisis of 2007-08. Such a programme would be run by the Reserve Bank of India (RBI) or a special purpose vehicle set up by the government. “There have been discussions for creating a special purpose vehicle to purchase assets from these entities to give them headroom to lend,” said a government official aware of the discussions.

Funding for such a structure could come from residual stakes in the Special Undertaking of Unit Trust of India (SUUTI). The government holding in Axis Bank and ITC through SUUTI is worth nearly Rs 32,000 crore.

“Credit is totally choked and there is a growing view that there is need for some urgent measures to support consumption,” the official said. NBFCs were providing lending support to various sectors at the retail level after banks had pulled direct credit following an asset-quality review led to the recognition of bad loans. NBFCs themselves have been gripped by a liquidity crisis since September last year.

With NBFCs holding on to liquidity in the absence of bank funding and defaults by some of them, small and medium businesses and not-so-prime customers have lost access to credit, resulting in a severe credit crunch.

Private consumption is forecast to grow 5.8% in the current fiscal, the slowest pace since 2013. As of January, year-on-year credit growth was 7.6% against 14.5% in the same time last year.


A study by ratings agency Crisil estimated that the NBFC credit pool rose only 3% in the first half of the year against nearly 18% in the previous two years.

State Bank of India principal economic advisor Saumya Kanti Ghosh has suggested measures to support NBFCs and reinstate cash flow.

“For NBFCs, RBI could seriously think of being the lender of last resort by providing liquidity against assets of NBFCs,” he said. “A formal arrangement could be made with the government of India of adjusting any haircut in the process with dividend transfers.”

Prime Minister Narendra Modi has held several rounds of meetings with industry and experts in small groups to discuss measures to revive growth.

The Troubled Asset Relief Program (TARP) was run by the US Treasury following the 2008 crisis to prevent the global credit markets from freezing over. Under the programme, nearly $442 billion of assets were purchased to provide liquidity to lenders. TARP made a $1 billion return on its investment.

The government’s partial credit guarantee scheme has been a nonstarter. This would cover the first loss of up to 10% of fair value of assets being purchased by banks.

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