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Some NBFCs pose ‘potential threat’ to stability, RBI says in annual report

The report also suggested that while an economic recovery is underway in spite of headwinds and challenges brought by the fiscal year 2022, structural reforms to improve medium-term growth potential hold the key to sustained, balanced and inclusive growth.

Reserve Bank of India, NBFCs, Business news, Indian express business news, Indian express, Indian express news, Current AffairsThe Reserve Bank of India (RBI)

THE RESERVE Bank of India (RBI) has cautioned in its annual report released on Friday that the higher risk appetite of non-banking finance companies (NBFCs) poses a “potential threat” to the country’s financial stability.

The report also suggested that while an economic recovery is underway in spite of headwinds and challenges brought by the fiscal year 2022, structural reforms to improve medium-term growth potential hold the key to sustained, balanced and inclusive growth.

Referring to NBFCs, the RBI report said: “The higher risk appetite of NBFCs has contributed over time to their size, complexity, and interconnectedness, thus making some of the entities systemically significant that pose potential threat to financial stability.”

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Nearly a dozen NBFCs have expanded their balance sheets exponentially, mainly in the retail segment, prompting the RBI to bring down the regulatory arbitrage of such companies with banks — and make them almost on par with banks in terms of regulatory oversight.

The central bank has been closely watching the top 50 NBFCs after the collapse of financial entities like IL&FS group, DHFL and Srei Infrastructure Finance in the past few years. It has strengthened on-site supervision and compliance as it believes the failure of an NBFC will pose a threat to the banking system. The total exposure of banks to NBFCs was Rs 10.54 lakh crore as on March 25, according to RBI data.

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On structural reforms, the RBI said they will help workers adapt to after-effects of the pandemic by reskilling and enabling them to adopt new technologies for raising productivity.

“The future path of growth will be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation within the target while supporting growth and targeted fiscal policy support to aggregate demand, especially by boosting capital spending,” the report said.

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“The conflict over Ukraine and the consequent spike in commodity prices has overcast the outlook for inflation in India as in the rest of the world,” it said.

Earlier this month, the RBI’s policy panel hiked the Repo rate by 40 basis points to 4.40 per cent to rein in inflation. “The immediate impact of geopolitical aftershocks is on inflation, with close to three-fourth of the consumer price index at risk,” the RBI said. The elevation in international prices of crude, metals and fertilisers has translated into a trade shock that has widened trade and current account deficits, it said.

High frequency indicators already point to some loss of momentum in the recovery that has been gaining traction from the second quarter of 2021-22, with 86.8 per cent of the adult population fully vaccinated against Covid and 3.5 per cent having received booster doses.

The near-term outlook for the global economy is fluid, rapidly evolving and extremely uncertain — and recovery is expected to suffer a significant loss of momentum in 2022, the RBI report said. It will likely have a bearing on longer-term prospects, including by exacerbating the scars of the pandemic, by deglobalisation, financial fragmentation and by setting back the initiatives towards climate change, it said.

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The central bank said the persistence of high inflation is forcing countervailing monetary policy action at a time when supporting economic recovery should have been assigned priority.

During 2022 so far (up to May 24), more than 40 central banks across advanced economies and emerging market economies have raised policy interest rates and/or scaled back liquidity. Policy trade-offs are becoming increasingly complex going forward and tail risks, including stagflation, loom large in several countries, the RBI report said.

It said financial markets face considerable uncertainty and tightening of global financial conditions. Inflation concerns amid growth worries have magnified the risks to emerging market currencies, with the risk of global spillovers, the report said.


 

First uploaded on: 28-05-2022 at 06:17 IST
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