India Finance Report – CAFRAL

GS Paper III Indian Economy

Context:

The Centre for Advanced Financial Research and Learning (CAFRAL), set up by the RBI, has raised concern over the rise in bank financing for non-banking finance companies.

Following the market correction prompted by a brief pause due to the COVID-19 pandemic, bank financing for NBFCs has risen again.
Banks’ exposure to NBFCs rose by 25.8 percent to Rs 13.83 lakh crore as of August 2023 as against Rs 10.99 lakh crore a year ago, the latest RBI data showed.
There is also a significant fall in reserves and surplus indicating that buffers grow thinner.

What are Non-Banking Financial Companies NBFCs?

A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business chit-business.

What is not considered under NBFCs?

Any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
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.

What is IL&FS default?

Infrastructure Leasing & Financial Services (IL&FS) is a non-banking financial company (NBFC).
IL&FS crisis which had around Rs 1 lakh crore of debt defaulted (June 2018).
IL&FS fell short of cash and defaulted on several of its obligations.

CAFRAL also warned against the many fake/ illegal lending apps in the marketplace, stating that these apps pose legal and collect information they could use maliciously.

FinTech has widened the range of products available to customers and expanded its distribution channels.
- For example: Across 80 application stores, nearly 1100 lending apps were available for Indian Android users.
Focus of Fintech: Non-bank lenders, given their access to novel credit delivery methods, provide credit to underserved borrower segments that are left behind in the credit access network by traditional banking.
For Example A large increase in the size of the retail lending loan books of NBFCs and FinTech lenders (2.75 times and 124.5 times, respectively, from 2014 to 2019), much larger than the loan growth for traditional banks.”
Risk of digital lending: It is important to assess the potential stability risks digital lending would pose to the larger economy as it grows.
- The poor and the marginalized are an important market segment that digital lending targets; any losses in digital lending have important implications for credit availability and financial inclusion for this group.
Predatory lending through deceptive lending practices or onerous loan terms can have detrimental consequences, especially for disadvantaged households.