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RBI To Include NBFCs Under Long-Term Operations

We are a country with over 100 crore people, and managing all finance-related issues of that large population is a big deal. That’s why India has set up a money market regular, capital market regulator, and many more. We are discussing all these due to the 5th Feb 2021 press release of RBI. RBI issued a press release titled “On Tap Targeted Long-Term Repo Operations – Inclusion of NBFCs”, The press release is simple in its intent, but a layman can not understand the context and meaning of that press release. Here we are explaining every minute point in details:-

What is RBI?

RBI stands for Reserve Bank of India. This bank is called money market regulator, bank of Banks, Bank of the Government, Custodian of the Indian Currency, and many more. The work area of RBI ranges from inflation control, money circulation, banks regulation, Forex Management, and others. The government established it in 1935 and is headquartered, in Mumbai.

What is NBFC?

Non-Banking Financial Institution (NBFC) is paramount in holding stakes in our country’s solvent development. They help in our government endeavor of financial inclusion and credit facility to all. They are registered under the Companies Act, 1956 and generally do the following business:-

It deals with securities, stocks, bonds, debentures, and shares issued by a government or private entity.
Provide loans and advances of a different type:- Home loan, gold loan, agricultural loan, personal loan, and others.
Insurance business
Chit fund business
Various industry-specific dealing in deposits, loan, etc.,
Property dealing

As the list indicated, they have a vast area of work. Some NBFCs are Bajaj Finance, Tata Capital, L& T infotech, Muthoot Finance, Aditya Birla Finance, etc.,

Why RBI has to announce the news?

Many people do not understand, Why the rbi issued this sort of press release? Here are some reasons for releasing that.

Cash Crunch and slow credit growth:- NBFCs run in the context of deposits and loans just like a banking institution. The 2020 pandemic affected the world and NBFC’s cash flow. They are not getting enough deposits, and at the same time, there are no positives vibes in the market for loans. Industries are reluctant to work on new projects, thus less or nil loan requirement. Market sentiment is overall down, and NBFC is, struggling due to high cash shortages and low credit requirements.
Non Performing assets:- When a financial institution offers a loan to an individual or an entity, the other person has to pay back the loan amount with interest. But what If, someone is not paying the loan amount back? As per RBI guidelines, if a loan is not paid even partially in the past 90 days, it turns into Non-performing assets (NPA). Due to less industrial activity and various held-up projects, the number of defaulters has increased. In that way, the money of NBFCs is with others, and they are not getting any earning on that.
Regulatory compliance:- Unlike the past, the government and RBI have made various provisions concerning NBFC in the current time. Companies like Sahara India, PACL India, Sharda Chit Fund, Rose Valley, etc., have brought negative publicity into the segment so, the regulator has become stringent in compliance and challenging.
No or NIL, helping hands from government and RBI:- Despite having so many challenges, NBFCs are growing at a good pace, but they need some helping hands. Authorities have many ways to help them. A simple policy change brings cheer to the sector, but that is not happening for long.

So the challenges of NBFCs are many, and they always go to RBI and others with their issues. In that background, RBI issued the press release on 05th Feb 2021.

What is a press release?

Vide the press release, RBI has allowed banks to give credit facility to NBFCs under the targeted long–term repo operations scheme (TLTRO). On 5th Feb 2021, RBI also released its quarterly monetary policy and stressed the need to give a booster to NBFCs. RBI praised the role of NBFCs in financial inclusion and extending credit to the rural, uneducated, and poor people. TLTRO scheme started in March 2020 in the background of Covid-19 pushed lockdown. Here RBI included five sectors earlier and later added five more sectors into that scheme. Banks give a more focused approach towards that sector and will support through better lending in TLTRO.

TLTRO scheme gives an entity option to get Rs- 1 Lakh crore funds with a floating rate of interest. The interest rate depends on the policy repo rate, and an entity is, given three years to pay back. After RBI inclusion into TLTRO, NBFCs will get more funds from Banks, and they may utilize that fund for their further growth.

In simpler terms, RBI has included all the NBFCs companies under the priority sector. So it will get more credit from banks.

What is the benefice of this bulletin?

NBFC companies will see faster growth as their main issue (Cash crunch) is resolved.
Banks will extend credit to NBFC, and they will further credit to needy businesses or individuals. It will bring economic growth. The industry will get funds.
The employment rate will rise. The market will get a positives impact, and hence more employment for people.
Government charges GST, Income tax on various financial transactions.
More tax collection gives good financial health to the government. Tax collection of government will increase.
Overall, it will bring positivity and continuity into the business.

RBI has taken a precise step in the right direction. We are hopeful that it will go in helping NBFCs in a long way.

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