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RBI warns of NBFC crisis contagion

Says failure of large non-banking finance companies comparable to the failure of big banks

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RBI warns of NBFC crisis contagion
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Reserve Bank of India's Financial Stability Report (FSR) report has warned of contagion losses due to failure of large non-banking financial companies.

The failure of large NBFCs, it said, could be compared to the failure of large banks. Mutual funds (MFs) are intertwined intimately with the rest of the financial system

So if there is any disruption in the MF market it has immediate and significant spillovers in the asset markets, it said, adding that the issues with regard to credit concentration in MF portfolios as also more generally issues of valuation in fixed income markets," the FSR report said. The banking system, it said, was stable with bad loan cycle peaking.

"Solvency contagion losses to the banking system due to idiosyncratic HFC or an NBFC failure show that the failure of the largest of these can cause losses comparable to those caused by the big banks, underscoring the need for greater surveillance over large HFCs/NBFCs," the central bank said in the FSR. Such losses would be led by housing finance companies.

It also flagged off concerns on growth slowing down in the country, but it added the moderate inflation in the country could help propel growth.

It said that the bad loans in the country have peaked, but added that banks required governance reforms.

"On the domestic front, economic activity turned paler in Q4:2018-19. Dip in consumption and private investment have exerted pressure on the fiscal deficit," RBI governor Shaktikanta Das said in the foreword to the FSR report.

Economic activity weakened in the second half of 2018-19, with Q4 recording 5.8% growth in GDP, bringing down the annual growth for 2018-19 to 6.8 % from the previous year's 7.2%. The main drivers of GDP – investment and consumption – both turned weak, the report said.

"This will require concerted efforts to revive private investment and continue with economic reforms. Overall, the situation warrants greater co-operation internationally as well as monetary and fiscal coordination domestically to ensure systemic stability," Das said.

Global trade tensions and geopolitical risks, the global economic growth prospects offer significant headwinds. These developments, the governor said, will have implications for financial stability in emerging markets and developing economies. Finding solace in the current inflation outlook which remains moderate, Das said that growth could help alleviate fiscal constraints to some extent.

The report said the Indian banking sector continues to show improvement as impairment ratios decline and credit growth picks up. The public sector banks (PSBs) showed a noticeable improvement with recapitalisation. Both provision coverage and capital adequacy improved. Significant rise in provisioning has impacted the bottomlines of PSBs, it said, adding that the efforts to improve the balance-sheets of banks should therefore continue. Among others, there should be a special focus on governance reforms in banks, it said.

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