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Former CEA wants RBI to run quality checks on NBFCs assets

The Reserve Bank of India should conduct an asset quality re..

The Reserve Bank of India should conduct an asset quality review of non-banking financial companies (NBFCs) as it did for banks in 2015 if the correct state of financial health of the industry is to be known, said former chief economic advisor.

“I am proposing an AQR for NBFCs,” Arvind Subramanian said. “We dont know whats there. If theres a problem, we shall get to the heart of it.”

An AQR on banks unearthed many hidden bad loans, which the banking industry has been peddling as standard loans. After the truth came to light, banks were forced to provide for losses and raise capital.

The former CEAs suggestion comes amid a serious credit squeeze thats threatening the survival of some NBFCs and has raised questions about their risk management practices. It has also pushed up cost of funds and raised concerns over their business model itself.

NBFCs because of lighter than banking regulations were nimble in raising funds from market and lending. In the process, they compromised on risk. They borrowed short term and lent long term.

In what is the biggest default in the financial services sector, IL&FS, which has a debt of about Rs 90,000 crore, missed payments and is under the administration of the government.

“Heres a Rs 90,000-crore elephant that comes out of the blue,” said Subramanian. “Just think about the quality of oversight.”

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