LPCurry's Blog: 'Realty a worry, NBFCs need more regulation'

MUMBAI: The Indian financial system is stress-free but there are some soft spots in the economy which are the cause for concern. And external factors like growth inequalities in an increasingly correlated financial world could also be a point of bother for the Indian economy, the second financial stability report by the Reserve Bank of India (RBI) pointed out.

On the domestic front, the report pointed out that the real estate sector and the rising delinquencies in the home loan sector could be cause for concern, and the central bank has already taken some steps that could mitigate the rising risks. "The developments in the housing sector are emerging as a concern due to sharp rise in prices in some centres and in some segments of the housing sector," the report noted. "There was significant increase in the delinquencies in housing loans though gross NPA ratio remained moderate at around 2.5%. This was largely a result of adverse credit selection during the periods of aggressive lending prior to the crisis," it added.

Overall, the RBI pointed out that there had been some improvement in the quality of the retail loan portfolio of banks, of which the housing loan has the largest share, and as the economy grows, this is expected to improve.

The report also pointed out that one of the key focus areas for policymakers would be to strengthen the regulations of large NBFCs and to look more closely and take appropriate measures into the regulatory gaps that exist in the non-banking space.

"The Reserve Bank is continuing its efforts to strengthen the prudential framework for banks and non-banking financial institutions . Strengthening the regulation of systemic linkages of large NBFCs and addressing regulatory gaps in the non-banking space would be key focus areas," RBI governor D Subbarao wrote in the foreword to the report.

It pointed out that the entry bar in the form of net owned fund requirement was low at Rs 2 crore, compared to Rs 300 crore for banks. Besides they are subjected to lighter touch regulation and do not face restrictions on capital market exposure. Further, there are no restrictions on setting up of subsidiaries, which allowed them to set up opaque structures the report said while adding that the structure allowed them to conduct non-financial activities by deploying funds in non-financial assets.

Source: http://timesofindia.indiatimes.com