Why the RBI should buy NBFC bonds–the economic times

lipped from: https://economictimes.indiatimes.com/blogs/et-editorials/why-the-rbi-should-buy-nbfc-bonds/ET Edit

Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.

Uday Kotak has stated that the Reserve Bank of India (RBI) might inevitably have to expand its balance sheet to support the economy amidst the raging pandemic. The central bank does precisely that when it carries out long-term repo operations. However, there is scope for the RBI to provide direct liquidity support to large non-banking financial companies (NBFCs) that play a vital role in meeting the credit requirements of swathes of small and medium industry.

It is true that RBI has shored up liquidity conditions for the banking system in the past one year for onward lending, and is providing further liquidity support this fiscal. Note that the central bank has announced its pathbreaking G-SAP, government securities acquisition programme under which RBI would purchase government paper to the tune of Rs 1 lakh crore in the first quarter of FY22. Further, its targeted long-term repo operations (TLTROs) are meant to provide credit to smaller NBFCs, but, again, via bank funding. But NBFCs do have a critical role in India’s credit system, providing, as they do, credit for largely un-banked segments, and the way forward is for the RBI to directly purchase the paper issued by major league NBFCs. It would rightly and speedily step up credit support across the board.

The central bank is in the process of thoroughly revamping its oversight on NBFCs with a four-layered regulatory structure, based on such parameters as operational size, leverage, interconnectedness and nature of activity. The way ahead is for the largest NBFCs to issue bonds for direct subscription by RBI. The central bank needs to phase in making use of corporate bonds in its liquidity management operations, to boost demand for these bonds.

This piece appeared as an editorial opinion in the print edition of The Economic Times.

END OF ARTICLE

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s