QUESTION : Discuss  the crisis being faced by NBFCs in India. Suggest what measures need to be taken to resolve the same ?






NBFCs related issues




Depositors in Lakshmi Vilas Bank Limited (LVB) recently got bailed out by the RBI. The non-banking financial companies, or NBFCs are also in trouble. 




  • The implications of this financial turmoil will reflect on the price performance of individual banks.


  • Price action of banks in the market can provide useful insights about the financial system dynamics that will change in the coming years.




  • The key metric for financial companies is the ‘Price to Book Value’ ratio (P/BV).


  • The P/BV reflects on two critical features:


o Adequacy of current capital and


o Runway available to the entity for profitable growth


  • Meaning of the values associated:


o A P/BV ratio above 1 indicates that the market believes that the company can grow and generate Return on Equity (RoE) above the hurdle rate that investors expect.


 The faster it can grow above the hurdle rate, the greater the P/B multiple (above 1).


o A P/BV below 1, indicates that the market either does not believe the bank has recognised all its bad loans or has the business model to deliver returns above the hurdle rate.


 It may be because the bank does not have a good deposit franchise, has bad cost discipline or a broken lending model.


  • There are banks that have a P/BV above 4 while some others are at much below 1, even at 0.25. Some NBFCs have values in excess of 7.




  • The K Curve depicts the inequality existing between different financial entities in terms of their attributes that determine their future growth and profitability.


  • Widening of the arms of the ‘K’ would imply that the inequality is increasing, while narrowing of the span of the ‘K’ would mean the opposite.




  • Private sector banks: Major banks have always had their P/BV above 3 on a consistent basis.


o Capital is available in plenty for these banks and the market is optimistic that these banks will generate attractive RoE.


o Therefore they have disproportionate incremental market share on both assets and liabilities.


  • Banks having P/BV of above 1.5: These banks have access to sufficient capital.


Both the above sets of banks are called Alpha banks. They would form one arm of the K, having adequate access to capital and the intrinsic ability to grow market share. The only constraint for these banks would be their ability to grow their liability franchise as changes in market share on deposits are much slower than changes on the asset side.




  • Business model issue: The new generation banks amongst these have to demonstrate consistent growth and stability on the liability side to earn their stripes for a higher P/BV again.


  • The market perceives issues with their lending practices and thereby, asset quality. That is the reason their P/BV is at very low levels.


  • They need to transform themselves by upgrading technology, add skilled manpower and improve management quality and governance.




 NBFC is a company registered under the Companies Act, 1956.


 It is engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.


 But, it does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.


 A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).




o NBFC cannot accept demand deposits.


o NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.


o Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.




  • The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs.


  • The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under the RBI Act.


  • The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits etc.


  • It is illegal for any financial entity to make a false claim of being regulated by the Reserve Bank to mislead the public to collect deposits. They will be liable for penal action under the Indian Penal Code in such a scenario.





  • For public banks


o Their current governance model depresses their P/BV.


o These banks should run in a professional manner with an ability to decide their own destiny.


o Along with the government move to consolidate PSU banks into few large banks, these banks must have differing value propositions to offer to the market.


o Clear level playing field amongst all banks: Government should move towards transparent and fair compensation for services rendered to various State-sponsored programmes to all players.


o PSU banks should be free to adopt human resource practices to on-board lateral talent to fill in skill set gaps and adapt to the new digital world.


  • More Alpha banks needed:


The Alpha banks widen the K Curve and squeeze out the weak banks. However, there is clearly more room for banks to migrate into the Alpha banks set.


For NBFCs, there is no clear path. The more valued NBFCs can become part of the Alpha banks in the long term.



QUESTION :  Evaluate the factors and implications of India’s exit from the Regional Comprehensive Economic Partnership (RCEP) .










India’s challenge is in securing an ‘Atma Nirbhar Bharat’ in the emerging world order.


  • RCEP implications: In an irreversibly more equal world, the Regional Comprehensive Economic Partnership (RCEP) has immediate geopolitical and economic implications.


It may lead to the west adapting to Asian rules and marking the end of the colonial phase of global history.


  • India’s perspective:India’s challenge lies in securing an ‘Atmanirbhar Bharat’ in the emerging digital order, navigating the U.S.-China technology and supply chain clash.




  • Largest regional trading agreement: Described so, Regional Comprehensive Economic Partnership was originally being negotiated between 16 countries – ASEAN members and countries with which they have free trade agreements (FTAs), namely Australia, China, Korea, Japan, New Zealand and India.


  • The objective of RCEP: To make it easier for products and services of each of these countries to be available across this region.


  • India’s exit: Negotiations to chart out this deal had been on since 2013, and India was expected to be a signatory until its decision last year to walk out from the agreement.




  • The RCEP trade pact includes a mix of high-income, middle-income, and low-income countries.


  • It was conceived at the 2011 ASEAN Summit in Bali, while its negotiations were formally launched during the 2012 ASEAN Summit in Cambodia.


  • The RCEP is the first free trade agreement between China, Japan, and South Korea (three of the four largest economies in Asia).


  • It is the first multilateral free trade agreement to include China.




  • Reapply for the membership:


o India will have to re-apply for membership negotiation.


o However, as an original negotiating participant of RCEP, India has the option of joining the agreement on easier terms, unlike new members.


  • Did not influence other Quad partners: Like Japanese and Australian plans regarding RCEP.


  • Leverage for China:


o Experts are interpreting the beginning of RCEP as a major development that will help China’s trade in Asia-Pacific region in the post-COVID-19 scenario.


o Also the idea of decoupling from China is not a substantive issue in a regional sense.


  • May affect bilateral trading relations: Staying out of RCEP may interfere with India’s bilateral trading with the RCEP member-countries and could potentially leave India with less scope to tap the large market that RCEP presents.


  • Repeatedly missing the Asian bus: Likening the present to India’s decision to stay out of the Asia Pacific Economic Cooperation (APEC) forum in the 1990s.


  • Push Aatmanirbhar Bharat: The policy of self-dependent India where India could decide the rules and consolidate “comprehensive national power”.




  • India’s priorities: The RCEP already includes India’s priorities such as rules of origin, services and e-commerce. The time-bound upgradation of national capacity through ‘Atmanirbhar Bharat’ should enable agreements with individual ASEAN countries. RCEP members have expressed their “strong will” to re-engage India, essentially to balance China.

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