The Reserve Bank of India headquarters in Mumbai. Photo: AFP
The Reserve Bank of India headquarters in Mumbai. Photo: AFP

The Reserve Bank of India has reiterated that it is not in favor of extending credit to non-banking finance companies (NBFCs), or shadow bankers, while the government continues to pitch for it.

In the wake of the collapse last year of Infrastructure Leasing and Financial Services (IL&FS), the country’s largest shadow banker and a major infrastructure lender, the other NBFCs are facing a cash crunch. So the government is keen for the central bank to open a separate lending window for them.

The Reserve Bank, on the other hand, feels there is no systemic liquidity issue, but there were solvency concerns in large entities. It is working on a liquidity framework for the NBFC sector and that may be released soon.

The central bank is also wary of the special lending window to NBFCs as these shadow bankers have extended credit to several companies with dubious asset quality, especially in the stressed real-estate sector.

The central bank had recently asked NBFCs with assets over 50 billion rupees (US$720 million) to appoint a chief risk officer. It is also keeping a tab on the liquidity position of these firms on a monthly basis.

NBFCs argue that the fund crunch was hurting consumer demand and this has led to a drop in auto and consumer loans.

It may be recalled that when former RBI governor Urjit Patel submitted his resignation last year, one of the contentious issues was the refinancing of NBFCs.

Also read: Exit of Urjit Patel compounds India’s economic instability

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