Budget 2020

RBI must infuse funds directly into NBFCs: Mundra

KOLKATA: The Reserve Bank of India should not hesitate to offer greater regulatory forbearance if the financial system needs it, former deputy governor SS Mundra said.

While RBI allowed a one-time debt restructuring for micro, small and medium enterprises, a need to do more in terms of providing relief in maintaining capital norms is being felt by several quarters.

“Despite being a part of the Basel Committee and G20, there are rooms for national discretion,” Mundra said Tuesday at a banking seminar.

It may be recalled that RBI meanwhile agreed to the broad contours of the KV Kamath Committee report which listed power, construction, real estate, FMCG and consumer durables among 26 sectors that require financial restructuring.

Mundra suggested that RBI would do well to infuse liquidity directly into the non-banking finance companies (NBFCs) and engage more with lenders across the spectrum to arrest the worsening credit cycle amid the talks of the economy going down and the need of protecting entrepreneurship.

“I am baffled to see RBI not providing (liquidity) support to the NBFC sector,” he said at the seminar organized by CII, citing global instances of the central banks providing support to corporates directly.

He said that RBI might not go to that extent but infusion liquidity to the intermediaries such as NBFC can well be thought of.

While RBI kept the inter-bank system flush with liquidity, the access to that remained limited only to banks and top rated non-bank lenders, with the small and medium ones facing cash flow gaps.

Banks’ annual credit growth has nearly halved to 5.5% at the end of August, compared with 10.2% a year back, reflecting a general lack of demand which the economy is suffering from.

At the seminar, other experts such as HSBC’s chief India economist Pranjul Bhandari underscored the need for a stronger fiscal response in parallel to monetary stimulus.

The government is reportedly seeking the parliament approval for an additional Rs 1.7 lakh crore additional spending on welfare scheme and recapitalise banks by infusing another Rs 20000 crore.

“While the central bank juggles multiple priorities, the nature of the health crisis also necessitates a strong fiscal response,” DBS Bank economist Radhika Rao said in a separate report. “First few courses of fiscal measures were timely to backstop economically vulnerable households, migrated labour and small businesses got through the challenging lockdown. The next leg of lift might be directed at boosting purchasing power through cash support, reduction in indirect tax rates for selected sectors, employment scheme for the urban poor, higher infrastructure spending indirectly lifting demand, alongside direct aid to most affected sectors, including discretionary services,” she said.