Funding needed to bolster liquidity crunched SMEs: RBI paper

Current policy is focussed on debt recoveries from larger borrowers

GN Bureau | October 3, 2017


#non performing asset   #NPA   #liquidity   #SME   #RBI   #External Commercial Borrowings   #Non-Bank Funding Sources and Indian Corporates  
Reserve Bank of India
Reserve Bank of India

Bolstering the funding sources for efficient but liquidity crunched small and medium-scale enterprises is also likely to be important in arresting the next wave of NPAs, said an RBI paper.

 
The paper “Non-Bank Funding Sources and Indian Corporates” by Apoorva Javadekar said that corporate bond, External Commercial Borrowings (ECBs) and Commercial Papers (CP) market have allowed at least a subset of firms to diversify their funding sources.
 
The ability to substitute the sources of financing is important to shield the economy from adverse real effects of a financial crisis. Small and medium-scale firms in India with sound financial health have indeed shifted to non-bank funding through bonds and CP market more aggressively in response to the banking stress.
 
“Results also indicate that larger firms have the ability to access the market in spite of having poor financial conditions. This leaves the subset of small firms with poor financials in a vulnerable situation. Current policy is focussed on debt recoveries from larger borrowers. The results indicate that bolstering the funding sources for efficient but liquidity crunched small and medium-scale enterprises is also likely to be important in arresting the next wave of NPAs,” said the paper.  
 
The paper said that the last decade has witnessed growing importance of non-bank funding sources for Indian corporate sector. Over the same time, Indian banking industry has been crippled by the ever-rising Non-Performing Assets (NPAs), which has reduced the effective supply of bank credit.
 
“It is found that small and medium-scale firms with good financial health are more likely to substitute bank credit with non-bank credit in response to the banking stress. The evidence also suggests that amongst the firms with poor financial condition, relatively smaller firms are effectively rationed out of the credit markets.”
 
Indian banking sector is facing the problem of growing NPAs. From 2014 to 2017, the average level of NPA to advances ratio across public-sector banks has almost doubled from 5 percent to 10 percent. Rising NPA levels have curtailed the supply of bank credit as banks are rebuilding capital or keeping aside larger share of loanable funds against future possible losses.
 
In parallel, Indian financial markets have witnessed a significant development of non-bank sources of credit such as corporate bonds, External Commercial Borrowings (ECBs) and Commercial Papers (CP).
 
In 2005, Indian non-financial firms raised roughly 80% of the new debt funding from banking institutions. But the relative importance of bank credit as a source of funding for non-financial firms has reduced dramatically over the last decade.
 
In 2016, non-bank debt through corporate bonds, CPs, and ECBs accounted for more than half of the new debt funding. The share of new non-bank credit to total new debt has risen steadily from around 20% in 2015 to around 53% in 2016. Indian corporates utilised ECBs heavily until 2012. Depreciation of Indian currency against USD in 2013 prompted the Indian corporates to substitute ECBs with domestic corporate bonds. CP issuances now constitute a significant segment and represent roughly 25 percent of non-bank credit. “This implies that in the context of growing financing needs in the economy, the importance of non-bank credit is also rising,” the paper said.

Comments

 

Other News

On a personal note: DIVINE

An underground rapper who grew up on Mumbai streets, Divine spins his music around his environment and poverty. His breakout single, ‘Meri Gully Mein’, along with fellow rapper Naezy caught Bollywood’s attention. The Hindi film ‘Gully Boy’ is inspired by their lives and gr

The role model for an IAS officer

Anil Swarup, an IAS officer of Uttar Pradesh cadre who retired in 2018, is a model bureaucrat who retained his optimism right till the end of service and exemplified dedication and commitment. His excitement at the opportunities that a job in the IAS provided is evident on every page of his new book publis

Reform of the civil services: At home and away

The question of reform of the civil services has been debated extensively at all levels at least over the last five to six decades after independence. Indeed, it was soon perceived that the Indian Administrative Service (IAS) may not be well equipped to deal with the problems of an emerging developing coun

The greatest challenge for any government

Shouting vengeance at all and sundry while wriggling out of holes of our own making seems to be our very special national characteristic. Some recent instances are illustrative of this attribute. A number of business tycoons with thousands of crores of unresolved debts have fled abroad with the government

The mysterious case of CBI’s legality

The Central Bureau of Investigation (CBI) came into existence, based on a Resolution of the home ministry, dated April 1, 1963 – a sheer coincidence that it also happens to be April Fool’s day. Over the past few months, we have seen the CBI live up to its founding day with great zeal, being i

The Evolution of Modi

Gujarat was passing through a turbulent phase in the 1980s. The decade began middle class agitations against new reservation policies, and the caste friction turned communal under the watch of chief minister Madhavsinh Solanki, alienating majority of urban population on both counts. The ground was ripe for

Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter