NBFC Crisis: RBI data shows eight times more registrations cancelled in FY19; these reasons to blame

The cancellation of registration restricts a bank from taking part in the business of non-banking financial institutions.

Amid severe liquidity crunch and the aftermath of IL&FS crisis, the cancellation of NBFC registrations skyrocketed by more than eight folds in 2018-19, compared to the previous year. 169 and 224 NBFC registrations were cancelled in FY17 and FY18 respectively, which suddenly surged to 1,851 cancellations in FY19, shows the latest RBI report on Trend and Progress of Banking in India 2018-19. The cancellation of registration restricts a bank from taking part in the business of non-banking financial institutions. Over 40 per cent of the retail portfolio of NBFCs are vehicle and auto loans and thus the slowdown in auto loans in FY19 can also be largely held responsible for the slump in aggregate demand, exacerbated by the postponement of vehicle purchases in anticipation of the implementation of BS-VI norms.

Non-banking financial institutions are a group of diverse financial intermediaries which serve as an alternative channel of credit flow to the commercial sector. NBFCs can be classified on the basis of their asset or liability structures; their importance; and the activities they undertake. Although the NBFC sector grew in size from Rs 26.2 lakh crore in FY18 to Rs 30.9 lakh crore in FY19, the pace of expansion stood lower mainly due to rating downgrades and liquidity stress in a few large NBFCs in the aftermath of the IL&FS event, said RBI.

Also Read: RBI cancels registration of 12 NBFCs; 5 more surrender their licences

To provide cushion to the NBFC businesses, the government has rolled out the scheme to provide a one-time partial credit guarantee for the first loss up to 10 per cent to PSU banks for purchase of high-rated pooled assets amounting to Rs 1 lakh crore from financially sound NBFCs or HFCs. The government has also provided additional support through the partial credit guarantee scheme, encouraging PSBs to acquire high-rated pooled assets of NBFCs.

Adding to it, the Finance Bill 2019 include measures to aid NBFCs in performing their role better. The central bank has also said that it will continue to maintain constant vigilance over NBFCs and take necessary steps to ensure overall financial stability.