RBI Should Act As Lender Of Last Resort, Provide Liquidity To NBFCs: SBI
RBI should “seriously think” of providing liquidity to NBFCs against assets held by lenders, SBI economists say in a budget note.
With liquidity issues persisting for NBFCs, economists at State Bank of India on Friday pitched for the Reserve Bank of India to play its role as the lender of last resort, something the central bank has avoided since the start of troubles in 2018.
In its report on expectations from Union Budget 2020-21, SBI economists said that RBI should "seriously think" of providing liquidity to non-banking financial companies against the assets held by the lenders. "Given the crisis of confidence in the financial markets, it is imperative that central banks don't forget their primary function of being the lender of the last resort.”
The NBFC sector has been reeling from a liquidity crunch since the collapse of IL&FS Group in August 2018.
So far, RBI has refused to play its role as the lender of last resort, terming the problem at select NBFCs as one created because of asset-liability mismatches, where entities depended on short-term liabilities to fund long-term assets and found the going difficult with hike in rates.
A slew of analysts have blamed the slowdown in lending by the liquidity-starved NBFCs for the fall in consumption, a contributing factor for the dip in India’s GDP growth rate.
The SBI report included help for NBFCs as part of its fiscal policy suggestions ahead of Budget 2020. It suggested a formal arrangement can be worked out wherein the Government of India can commit to adjust the haircuts that come banks' way by settling it with RBI's dividend transfers.
The economists said the measures taken so far by the government and RBI have been focused on long-term strengthening of NBFC sector. They also pitched for deferment of principal repayments by 50 systemically important NBFCs and housing finance companies for a specified period.
Among other measures, SBI economists recommended the government to focus on growth and not on meeting the fiscal deficit target, warning that not doing so can aggravate issues of growth slowdown.
They pitched for a higher fiscal deficit target of 3.8 percent for 2020-21, or the same level as its revised estimate for 2019-20.
The government should adopt a new fiscal consolidation path from 2021-22 which will look at 0.20 percent narrowing of the fiscal gap every year till FY25, they said.