Topic Of The Day:-“Not Just Liquidity: On Nbfcs Crisis”
Policymakers Must Address The Structural Problems Behind The NBFCs Crisis
The default of Infrastructure Leasing & Financial Services (IL&FS) on several of its debt obligations over the last couple of months has raised serious questions about how regulators missed the growing debt pile of a systemically important financial institution. But apart from the obvious failure of regulators to do their jobs, the IL&FS saga has also exposed the underlying weaknesses in the non-banking financial company (NBFC) sector as a whole which has depended heavily on low-cost, short-term debt financing to sustain its shaky business model. As both international and domestic interest rates continue to rise, the stocks of NBFCs have been punished as investors expect the profit margins of these companies to come under pressure as their borrowing costs rise. Then there is the further, and more serious, risk of NBFCs being unable to roll over their short-term debt in case of a severe credit crunch in the aftermath of the IL&FS saga. Both these factors have combined to put an end to the dream run of NBFCs, which have enjoyed high valuations amidst rapidly growing profits over the last few years. The precipitous crash of shares of Dewan Housing Finance Ltd. has been the defining moment of the present crisis. It is worth noting that the rise of NBFCs was fuelled primarily by the demise of traditional banks which have been unable to lend as they were bogged down by non-performing loans. Meanwhile, NBFCs with strong pricing power, which can somehow successfully achieve the transfer of higher borrowing rates to their own borrowers, may still survive rising interest rates.The response of policymakers to the ongoing crisis, which seems warranted if its purpose is to prevent a wider systemic crisis, is fraught with other risks. The Reserve Bank of India, the National Housing Bank and the State Bank of India last week decided to increase the supply of liquidity in the market to keep interest rates under control. The RBI has also urged NBFCs to make use of equity rather than debt to finance their operations. This is apart from the government’s decision to replace IL&FS’s management and commitment to providing the company with sufficient liquidity. While offering easy money may be a welcome measure in the midst of the ongoing liquidity crisis, the prolonged supply of low-cost funds to the NBFC sector also creates the risk of building an unsustainable bubble in various sectors of the economy. Defaults associated with any such bubbles will eventually only affect the loan books of lenders. State bailouts could also fuel the problem of moral hazard as other financial institutions may expect a similar lifeline in the future. Policymakers should thus try to focus on taking steps to address structural problems that contributed to the crisis. This includes steps necessary to widen the borrower base of NBFCs which have been banned from accepting deposits. This would allow NBFCs to tap into more reliable sources of funding and avoid similar liquidity crises in the future.
MEANING AND WORDS
1) obligation
Meaning: an act or course of action to which a person is morally or legally bound; a duty or commitment.
Synonyms: Duty, commitment, responsibility
Antonyms: Asset, Disbelief, Disagreement
Example: “I have an obligation to look after her”
2) Pile
Meaning: A heap of things laid or lying one on top of another.
Synonyms: Heap, stack, mound
Antonyms: Debt, lack, Ditch
Example: “He placed the books in a neat pile”
3) Obvious
Meaning: Easily perceived or understood; clear, self-evident, or apparent.
Synonyms: Clear, plain, plain to see
Antonyms: Dull, Dark
Example: “Unemployment has been the most obvious cost of the recession”
4) Expose
Meaning: Make (something) visible by uncovering it.
Synonyms: Reveal, uncover, lay bare
Antonyms: Conceal. Cover, Hide
Example: “At low tide, the sands are exposed”
5) Sustain
Meaning: Cause to continue for an extended period or without interruption.
Synonyms: Continue, carry on, keep up
Antonyms: Harm, Hinder
Example: “He cannot sustain a normal conversation”
6) Shaky
Meaning: Not safe or reliable; liable to fail or falter.
Synonyms: Trembling, shaking, tremulous
Antonyms: Brave, Certain, Firm
Example: “A cracked, dangerously shaky table”
7) Aftermath
Meaning: The consequences or after-effects of a significant unpleasant event.
Synonyms: Repercussions, after-effects, by-product
Antonyms: Cause, Origin, Source
Example: “Food prices soared in the aftermath of the drought”
8) Precipitous
Meaning: (of a change to a worse situation or condition) sudden and dramatic.
Synonyms: Sudden, rapid, swift, abrupt
Antonyms: Calm, Flat, Kind
Example: “A precipitous slide in the government’s popularity”
9) Demise
Meaning: The end or failure of an enterprise or institution.
Synonyms: End, break-up, disintegration
Example: “The demise of industry”
10) Bogged Down
Meaning: To be/become so involved in something difficult or complicated that you cannot do anything else
Synonyms: Entangled, involved, overwhelmed
Antonyms: Advance, Forward, Help
Example: Let’s not get bogged down with individual complaints
11) Fraught
Meaning: Causing or affected by anxiety or stress.
Synonyms: Full of, filled with, swarming with
Antonyms: Empty
Example: “Marketing any new product is fraught with danger”
12) Prolonged
Meaning: Continuing for a long time or longer than usual; lengthy.
Synonyms: Lengthen, make longer, extend
Antonyms: Cease, Expedite, Halt
Example: “An idea which prolonged the life of the engine by many years”
13) Unsustainable
Meaning: Not able to be maintained at the current rate or level.
Example: “Macroeconomic instability led to an unsustainable boom”
14) Hazard
Meaning: A danger or risk.
Synonyms: Danger, risk, peril
Antonyms: Safety, Certainly
Example: “The hazards of childbirth”
