SS Mundra, former Deputy Governor of the Reserve Bank of India (RBI), on Tuesday, said that the central bank should consider infusing liquidity into non-banking finance companies (NBFCs) as they have become cash-starved in the wake of the Covid-19 pandemic.

The revival of the NBFC sector was crucial, particularly for supporting MSMEs. Even while the slowdown following the outbreak is expected to hurt most industries, the MSME sector is expected to be among the worst affected. In order to ensure a steady flow of funds to support the sector, it is important to pump in adequate liquidity into NBFCs.

“I am baffled as to why the RBI has been so reluctant to the NBFC sector. We should be conscious that the sector is very important, particularly to MSMEs. They can look at infusing liquidity in the sector,” said Mundra at the 13th banking colloquium organised by the CII on Tuesday.

He also felt that the central bank should not hesitate in extending greater regulatory forbearance if a need arises.

While the RBI has allowed a one-time debt restructuring for MSMEs, need has been felt for additional relief to be able to maintain capital norms.

“Despite being a part of Basel Committee and G20, there is room for national discretion,” he pointed out.

Credit demand to pick up

Meanwhile speaking at the colloquium, CS Ghosh, MD and CEO, Bandhan Bank, said that while credit demand has been lacklustre during the first two quarters of this fiscal, it is expected to start picking up in the third quarter.

However, according to Pranjul Bhandari, Chief India Economist, HSBC Securities & Capital Markets (India) Private Ltd, one of the factors that would continue to hurt Indian economy would be the weak banking sector.

“Even before the pandemic, the banking sector had problems of high level of NPAs; and now with this crisis, it is only going to increase and this will make banks more risk averse, and if they do not fund, then growth will be impacted,” she pointed out.

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