India’s central bank doesn’t want investors to know how deep the rot is in the country’s shadow banks

• The governor of the Reserve Bank of India, Shaktikanta Das, has categorically ruled out an official asset quality review of India’s shadow banks.
  
• The reason? A risk review might endanger the recovery in liquidity in the sector as an adverse set of findings will result in investors steering clear.
  
• However, the RBI will continue to monitor the sector intensely to ensure compliance with risk norms and a repeat of the IL&FS default.

The governor of the Reserve Bank of India, Shaktikanta Das, has categorically ruled out an official asset quality review of India’s shadow banks, according to media reports.

The reason? It doesn’t want to scare investors with its findings.

Speaking at a conference for foreign institutional investors in Hong Kong, Das suggested that an asset quality review of non-banking financial companies (NBFCs) might endanger the recovery in liquidity in the sector as an adverse set of findings will result in investors steering clear. NBFCs make up a large part of the country’s shadow banking sector.

More importantly, with the liquidity crisis slowly dissipating, it still might be too early for an exhaustive review of India’s shadow banks.

In December last year, Arvind Subramanian, India’s former chief economic advisor, said it was high time for a risk review of NBFCs to ascertain the extent of balance sheet weakness and non-performing loans at these institutions. An asset quality review of India’s commercial banks in 2015-16 helped reveal the true extent of the bad loan crisis.

Towards the end of 2018, a default by IL&FS, India’s largest infrastructure lender, triggered a collapse in the NBFC sector, as banks and mutual funds curbed their investments and pulled out capital. The sector is large, with over 2,000 such shadow banks handling a cumulative total of ₹3.4 trillion worth of loans.

Das did maintain, however, that the RBI was ready to step in and support the sector, in addition to providing ample liquidity through its purchase of government securities.

The RBI will also continue to monitor the sector intensely to ensure compliance with risk norms and a repeat of the IL&FS default.

In the last few months, it has tried to alleviate the liquidity crunch by making it easier for shadow banks to lend to sell off their loans.This year, it also plans to regulate the sector more effectively by establishing a data collection system to compile monthly lending and borrowing data of NBFCs.


SEE ALSO:

As India’s shadow banks brace for a tough 2019, the central bank and government will try and prevent a repeat of the IL&FS crisis by solving the data problem

The Reserve Bank of India just made it a lot easier for the country’s shadow banks to sell off their loans