INSUBCONTINENT EXCLUSIVE:
announced a fresh capital infusion of about $10 billion (Rs 70,000 crore) into debt-burdened state banks and credit guarantees to support
shadow lenders in a bid to boost lending and revive the economy.India's economy has sagged in the past year partly because many small and
medium-sized businesses and consumers have found it tough to borrow from the banks, or from the shadow lenders, officially known as
non-banking financial companies (NBFCs).This is because some of the banks and NBFCs are laden with bad debt which has affected their ability
to lend.Economists, credit rating agencies and some of the lenders welcomed the moves, saying they are vital if India is to reform its
banking sector and grow the economy at rates above 8 per cent targeted by Prime Minister Narendra Modi's government.The economy grew at a
rate of just 5.8 per cent in the January-March quarter, a five-year low."The credit guarantee provided by the government will further open
up the liquidity line for fundamentally sound NBFCs," said George Alexander Muthoot, managing director of Muthoot Finance Ltd, one of the
biggest non-banking lenders.The injection of funds, which was disclosed in the annual budget statement delivered by new Finance Minister
Nirmala Sitharaman, is the latest in a series over the past four years
More than Rs 3 lakh crore ($43.81 billion) of government money has gone into the banks in that period.The state-owned banks, which control a
majority of banking assets in India, have been weighed down by nearly $150 billion in stressed assets
The bad debts resulted from risky lending they pursued in the previous few years, particularly to infrastructure projects that then
failed.Additional LiquidityThe government also announced that it will for the next six months provide partial credit guarantees to state
banks that buy highly rated pooled assets from financially sound NBFCs.To make this easier for banks, the Reserve Bank of India (RBI)
announced later on Friday it would provide additional liquidity to banks for purchase of assets or for lending to NBFCs
Authorities will also ease restrictions on foreign institutional investors that have invested in NBFCs' debt securities.Furthermore, the
government said that in future NBFCs will no longer have to set aside additional capital when selling their debt in public markets."NBFCs
are playing an extremely important role in sustaining consumption demand as well as capital formation in (the) small and medium industrial
segment," Ms Sitharaman said.India has nearly 10,000 registered NBFCs lending to millions of households who might not be able to borrow
directly from a commercial bank.While they might provide loans more easily, they generally charge higher interest rates than the banks,
often as high as 21-24 per cent a year
Ironically, the NBFCs have in the past borrowed much of their money from banks, as well as mutual funds and via debt sales.However, after
defaults by one giant NBFC, Infrastructure Leasing - Financial Services (IL-FS), last year the asset quality in the sector has come under
As a result, the NBFCs borrowing costs have surged as many banks and mutual funds stopped lending to them.Ms Sitharaman also announced that
the RBI will get much more regulatory authority over the NBFCs in proposed legislation that has been drawn up.Currently, NBFCs are loosely
regulated by host of regulators including market regulator - the Securities and Exchange Board of India (Sebi), and the National Housing
Board."Structurally, it is a positive move as it will help in improving supervision," said Karthik Srinivasan, the head of financial sector
ratings at credit rating firm ICRA.Get Breaking news, live coverage, and Latest News from India and around the world on
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