YES Bank restructuring may intensify NBFI’s challenges
For Prelims: About Fitch Ratings.
For Mains: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Context of News:
- According to the Fitch Ratings, India’s non-bank financial institutions (NBFI) will likely face renewed pressure on funding and liquidity following the RBI’s takeover of Yes Bank this month.
About Fitch Ratings:
- Fitch Ratings Inc. is an American credit rating agency and is one of the Big Three credit rating agencies, the other two being Moody’s and Standard & Poor’s. It is one of the three nationally recognized statistical rating organizations designated by the U.S. Securities and Exchange Commission in 1975.
- Fitch ratings are an international credit rating agency based out of New York City and London. Fitch bases the ratings on factors, such as what kind of debt a company holds and how sensitive it is to systemic changes like interest rates. Fitch Ratings is a leading provider of credit ratings, commentary and research. Dedicated to providing value beyond the rating through independent and prospective credit opinions, Fitch Ratings offers global perspectives shaped by strong local market experience and credit market expertise.
How NBFSs is Different from Banks?
- NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks
Details of Fitch Ratings about NBFC’s Challenges:
- According to Fitch Ratings following the Reserve Bank of India (RBI) last week’s decision of seizing Yes Bank after noticing a surge in withdrawals by depositors. The likely consequences will compound the credit squeeze across the country’s financial system, adding to current economic uncertainty.
- The move on Yes Bank comes as the impact of the coronavirus is beginning to be felt in India, raising further risks to economic growth and non-banking finance companies’ asset quality. “Rising asset quality and funding risks will place pressure on ratings if conditions worsen materially.
- The NBFI sector’s direct exposures to Yes Bank should be modest as a whole. Yes Bank’s advances to NBFIs equated to roughly 1-2% of the NBFI sector’s total bank funding, and the sector’s asset exposures to the bank would be similarly moderate,” Fitch said, adding the recent announcement may bring about broader contagion effects for NBFI funding conditions.
- Basel Norms can Back Fire:
- The RBI’s planned reconstruction scheme broadly protects the deposits and liabilities of the bank, but calls for a write-down of its Basel III AT1 instruments at present. This may trigger another round of investor risk aversion that tightens market access and raises overall funding costs for borrowers, with wholesale NBFIs likely to remain more vulnerable in this situation.
- An extended credit squeeze will likely exacerbate asset quality risks for the financial sector including NBFIs, which are already facing pressure from a general economic and property-sector slowdown, and an evolving COVID-19 situation
- NBFC’s Dependency on Banks:
- Banks have been an important source of liquidity for NBFIs amid the funding squeeze in the local debt markets over the past 18 months, and any weakness in bank deposit funding would constrict liquidity available for lending to the NBFI sector.
- These events of messy banks add to the challenging operating environment for Indian NBFIs, with rising uncertainty over funding conditions in the near term.
Challenges of NBFCs:
- Funding issue due to the absence of refinancing option:
- Banks in India have several options for refinancing such as RBI, NABARD, EXIM Bank, and SIDBI. Likewise, Housing Financing Companies (HFCs) also have the refinancing alternative, and it refinances from NHB (National Housing Bank), the regulator of HFCs.
- However, NBFCs have to hinge on banks, competitors, or the capital markets for raising resources every time. In turn, this could be unfavorable to the sustainability of the NBFCs growth like in the case of distress. Furthermore, the flow of funds from these sources could dry up without much notice.
- Difficult compliances for NBFC in India:
- Once you have incorporated your NBFC, you need to follow its compliances strictly. There are a number of NBFC compliances for different types of NBFCs which they have to file quarterly, half-yearly, and annually.
- Therefore, if you are running a company of loan and advances, etc., then it becomes quite tough to look at all the things at own. Furthermore, it becomes really difficult to figure out how and when to file the prescribed returns.
- Absence of flexibility in the classification of loan NPAs:
- For large corporates, the NPA (Non-Performing Assets) norms are quite relevant. However, businesses with irregular cash flow have a cascading impact regarding all the delays in payments.
- NBFC registration requires approval from the RBI, which is hard to acquire the license. Furthermore, the NBFC documentation process is quite complicated. Apart from the licensing, following the compliances of NBFC is also a challenging task in itself.
- Budget 2020-21 takes a progressive step ,which include the amendment of the RBI Act to give additional powers to RBI with regard to regulation of NBFCs and housing finance companies (HFCs) being brought under the purview of RBI, and the amendment to the Banking Regulation Act to accord more powers to the RBI on regulation of the urban cooperative banks.
India remains second-largest arms importer in 2019
For Prelims: Stockholm International Peace Research Institute (SIPRI).
For Mains: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.
Context of News:
- According to the report of Stockholm International Peace Research Institute that tracks arms deals around the world; India retains its position as the second-largest arms importer in the world followed by Saudi Arabia. India was the second-largest arms importer in the world over the past five years.
About Stockholm International Peace Research Institute (SIPRI):
- The Stockholm International Peace Research Institute (SIPRI) is an independent, internationally-oriented organization that focuses its research and outreach activities on subjects such as general security, conflict and peace, armaments and disarmament, and arms control
- Based in Stockholm and established in 1966, SIPRI is regularly ranked among the most respected think tanks worldwide.
- Although SIPRI is not a teaching institute, it does receive interns who wish to learn more about its research activities. Contacts are maintained with other research centres and individual researchers throughout the world, several international and regional organizations, and diplomatic missions. SIPRI also regularly receives parliamentary, scientific and governmental delegations.
Stockholm International Peace Research Institute Report in Detail:
- India continues to be the 2nd biggest arms importer after the Saudi Arabia.
- Russia remained the largest arms supplier to India in 2010-14 and 2015-19 but deliveries fell by 47%.
- India is the world’s fifth largest military spender after US, China, Russia and Saudi Arabia. Arms imports to India, which used to be the world’s largest importer, decreased by 32 per cent and imports by bitter rival Pakistan fell 39 per cent.
- Arms imports from Israel and France increased, by 175% and 715% respectively, making them the second- and third-largest suppliers during 2015-19.
- India has moved to the 23rd position among the top 25 weapon exporters with Myanmar, Sri Lanka and Mauritius being the biggest clients of India.
- Over five years from 2015 to 2019, international arms exports grew by 5.5 per cent from the 2010-2014.
- Shipments from the US grew by 23 per cent, raising its share of total global arms exports to 36 per cent. Between 2015 and 2019, the US delivered major arms to 96 countries. Half of US arms exports went to the Middle East, and half of that to Saudi Arabia, the world’s number one importer of major arms.
- Rethinking Make in India:
- Import dependence needs to change with a focus on ‘Make in India’, so that India makes at least 50% of its defence equipment in less than a decade. It will save foreign exchange, build technological capacity for civilian manufacturing and grow new skills. If we export defence equipment, it can generate forex. Just as India’s space missions and nuclear R&D have dual civil-military use, so does defence manufacturing.
- For Make in India in defence, FDI will be needed for heavy capital and technology requirements, to build global supply chains involving multiple vendors in India, to rapidly implement projects to avoid obsolescence.
- To become a major defence manufacturer, India needs to reexamine its structure of governing defence production, as the Chinese did in 2000. Earlier, the Chinese defence industry was separated, Soviet-style, between R&D and manufacturing units.
- Thrust on Private Players:
- There is a need to increase private sector participation. This needs to be a focus area for this sector. It then went on to suggest the creation of a National Defence Manufacturing Council, under the aegis of the Prime Minister’s Office” to ensure that domestic manufacturing “gets due focus and support from the different governmental agencies.
- Creating and sustaining a private sector in defence manufacturing is not easy. It is always fraught with the risk of political controversy for the simple reason that it is an industry with only one buyer the government.
- India has set an ambitious target of doubling its defense exports over the next five years, as a slowing economy has forced the country to cut down on imports. As country already manufacturing artillery guns, aircraft carriers and submarines, and that India’s share in global defence exports had increased.Now our aim should be to increase defense exports to 5 billion dollars as retreated by PM Modi.
- As Indian armed forces are undergoing a modernization plan after years of being saddled by outdated aircraft and warships, this is an opportunity for India to make its shift from global importer to global exporter in the world.