{"id":38550,"date":"2025-03-05T18:58:04","date_gmt":"2025-03-05T13:28:04","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=38550"},"modified":"2025-03-05T18:58:05","modified_gmt":"2025-03-05T13:28:05","slug":"imf-raised-concerns-related-to-nbfcs","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/05-03-2025\/imf-raised-concerns-related-to-nbfcs","title":{"rendered":"IMF Raised Concerns Related to NBFCs\u00a0"},"content":{"rendered":"\n<p><strong>Syllabus: GS3\/ Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The International Monetary Fund (IMF) has raised concerns about <strong>potential financial instability in India<\/strong> due to the concentrated exposure of <strong>Non-Banking Financial Companies (NBFCs)<\/strong> to the power and infrastructure sector.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Major Highlights<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The IMF report titled <strong>&#8220;India Financial System Stability Assessment&#8221;<\/strong> focuses on power sector loans.\n<ul class=\"wp-block-list\">\n<li>The IMF studied banks&#8217; resilience in a potential stagflation scenario, where growth slows and inflation rises.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Dependence on bank borrowings <\/strong>for financing increased since fiscal 2019.\n<ul class=\"wp-block-list\">\n<li>In fiscal 2024, <strong>63% of power sector loans<\/strong> were from the top three Infrastructure Financing Companies (IFCs), a type of NBFC.<\/li>\n\n\n\n<li>This share increased from 55% in 2019-20.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Concerns: <\/strong>It raises concerns about <strong>financial instability in India due to NBFCs&#8217;<\/strong> high exposure to the power and infrastructure sectors.\n<ul class=\"wp-block-list\">\n<li>High exposure to the power sector, which faces structural challenges, increases financial instability risks.<\/li>\n\n\n\n<li>NBFCs are interconnected with banks, corporate bond markets, and mutual funds, which could amplify stress if vulnerabilities arise.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Stress tests showed<\/strong> public sector banks (PSBs) may struggle to maintain a <strong>capital adequacy ratio (CAR) of 9% during stagflation.<\/strong>\n<ul class=\"wp-block-list\">\n<li>RBI mandates a CAR of 12% for PSBs and 9% for scheduled commercial banks.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Regulatory Concerns:<\/strong> State-owned NBFCs are exempt from large exposure limits, raising regulatory concerns.<\/li>\n\n\n\n<li><strong>Recommendations:\u00a0<\/strong>\n<ul class=\"wp-block-list\">\n<li>Strengthening liquidity regulations for NBFCs, especially those with significant infrastructure exposure.<\/li>\n\n\n\n<li>Closer monitoring of NBFCs&#8217; lending patterns and improved risk management frameworks to prevent financial disruptions.<\/li>\n\n\n\n<li>State-owned NBFCs should face the same regulatory standards as private NBFCs to ensure fairness.<\/li>\n\n\n\n<li>Emphasized the need for better data sharing on NBFC credit and exposure.<\/li>\n\n\n\n<li>Prioritizing financial stability over developmental motives for banks.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What are Non-Banking Financial Corporation (NBFCs)?<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Definition: <\/strong>A company registered under the <strong>Companies Act, 1956,<\/strong> engaged in loans, advances, and acquisition of shares\/stocks\/bonds\/debentures\/securities issued by government or local authorities, or other marketable securities.<\/li>\n\n\n\n<li><strong>Exclusions: <\/strong>Does not include institutions primarily involved in:\n<ul class=\"wp-block-list\">\n<li>Agriculture activities;<\/li>\n\n\n\n<li>Industrial activities;<\/li>\n\n\n\n<li>Sale\/purchase of goods (except securities);<\/li>\n\n\n\n<li>Provision of services;<\/li>\n\n\n\n<li>Sale\/purchase\/construction of immovable property.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Residuary Non-Banking Company:<\/strong> A company <strong>whose principal business is receiving deposits<\/strong> under any scheme or arrangement (lump sum or installments) is also classified as a non-banking financial company (NBFC).<\/li>\n\n\n\n<li><strong>NBFC Key Functions:\u00a0<\/strong>\n<ul class=\"wp-block-list\">\n<li>Provide financial products to individuals and businesses.<\/li>\n\n\n\n<li>Fund infrastructure and development projects.<\/li>\n\n\n\n<li>Offer investments in securities.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Regulatory Oversight:<\/strong> The functions of NBFCs are managed by both the <strong>Ministry of Corporate Affairs and the Reserve Bank of India (RBI).<\/strong><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is the difference between banks &amp; NBFCs?<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:\n<ul class=\"wp-block-list\">\n<li>NBFC cannot accept demand deposits;<\/li>\n\n\n\n<li>NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;<\/li>\n\n\n\n<li>Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<p><strong>Source: <\/strong><a href=\"https:\/\/www.thehindu.com\/business\/nbfc-stress-may-lead-to-system-liquidity-due-to-interconnectedness-imf\/article69290797.ece#:~:text=Stress%20in%20the%20Non%20Banking,said%20IMF%20in%20a%20report.\" rel=\"nofollow noopener\" target=\"_blank\"><strong>TH<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The International Monetary Fund (IMF) has raised concerns about potential financial instability in India due to the concentrated exposure of Non-Banking Financial Companies (NBFCs) to the power and infrastructure sector.<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-38550","post","type-post","status-publish","format-standard","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/38550","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=38550"}],"version-history":[{"count":2,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/38550\/revisions"}],"predecessor-version":[{"id":38561,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/38550\/revisions\/38561"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=38550"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=38550"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=38550"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}