Letter to BS: RBI can't allow liquidity crisis to lead to solvency issues

This refers to the editorial “Repairing NBFCs” (June 27). Since the shadow banks are also playing a key role as drivers of economic growth, it is imperative to prevent and save these banks from slipping into insolvency. It is essential to recognise non-banking financial corporations (NBFCs) that need support from the regulator and the government to initiate corrective action. An asset quality review of the crisis-ridden NBFCs will divulge its real financial health and based on that the banking regulator must place the weak NBFCs under corrective action as is in vogue in the case of banks. The funding extended by the NBFCs to long-gestation projects, without matching the availability of long-term resources must be refinanced by the strong banks.

 

The NBFCs must be restricted from resourcing short-term funding from financial institutions to roll over the resources to match asset-liabilities to ensure a healthy balance sheet. They must refrain from issuing long term loans to avoid lack of cash surplus to meet the repayments. Investors lost huge wealth because of the NBFCs imprudent business and it caused a sharp decline in the market values of the script of many NBFCs. It is paramount to reinvigorate the shadow banking sector to regain the confidence of the market. The crisis, if continues unaddressed, will negatively impact the overall growth of the economy.

 

VSK Pillai, Kottayam

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