IBPS PO-Descriptive 34

India’s Non Banking Financial Companies (NBFCs), also called shadow banking system that provides services similar to traditional commercial banks but outside normal banking regulations.
Role of NBFCs in the Indian Economy are:
1. They play supplementary role in the economy and cater to the urban rural poor and the Micro finance institutions.
2. They help in the goal of achieving the financial inclusion.
3. They are engaged into lending to infrastructure sector and factoring business.
Therefore, NBFCs bring the diversity into the financial sector.
Issues plaguing the NBFCs are:
1. Due to IL&FS crisis, several corporate, mutual funds and insurance companies are facing liquidity crunch in their own backyard, which can lead to shortage of funds to NBFCs.
2. Banks showed slow down in lending of finance to NBFCs.
3. There is asset-liability mismatch in the operations of NBFCs like IL&FS. It means that firms borrow funds from the market for 3-5 years and lend for longer terms like 10-15 years.
4. In such case when interest rates rises, the profit margins come under pressure and subsequent shortage of fund availability.
5. Sharp losses of NBFC stocks triggered a vicious cycle as losses in leveraged position led to selling in other stocks.
To improve the situation, RBI will inject Rs 40000 crore into the system through purchasing of government securities to meet the festive season demand for funds. Also, SBI offered to bail out NBFCs with a proposal to buy good quality assets worth 45000 crore.