International Monetary Fund identifies significant systemic threat from Non-Banking Financial Companies (NBFCs) due to their involvement in the power sector
The International Monetary Fund (IMF) has identified major systemic risks in Non-Banking Financial Companies (NBFCs) in India, particularly in the power sector. The risks associated with the largest NBFC, the Power Finance Corporation (PFC), which plays a leading role in the energy transition and net-zero initiatives, require assessment through additional regulatory measures.
The IMF has recommended several measures to address these risks. Enhanced data and tools for systemwide and contagion risk analysis are essential, as is the implementation of broader macroprudential policy. The IMF also suggests aligning the regulations of state-owned NBFCs with those of the private sector, due to their current exemption from large exposure limits.
One of the key recommendations is giving the Insurance Regulatory and Development Authority of India (IRDAI) legal powers for starting group supervision. This will help in better monitoring and managing the risks associated with NBFCs. The central bank should also have tools more suited for systemic liquidity events among NBFIs and markets, and be prepared to expand crisis-time liquidity policy options.
The IMF is concerned about the concentrated exposures of NBFCs, particularly to the power sector, which could lead to systemic issues. As of March 2023, Indian state-sector discoms had accumulated Rs 6.76 lakh crore worth of losses and Rs 6.61 lakh crore worth of debt, exacerbating the vulnerabilities in the power sector.
In FY2023, exposures of the top 50 government-owned NBFCs, totalling Rs7.8 lakh crore, accounted for 40% of the total corporate credit in the NBFC sector and are all linked to the power industry. The Reserve Bank of India (RBI) has expressed concern over the growing exposure of banks to NBFCs, but did not specify the potential risks or consequences of this high exposure to the power sector.
The IMF also emphasizes the need for finalizing and enacting the resolution legislation aligned with international standards. A comprehensive resolution regime is crucial in addressing the systemic risks associated with NBFCs. The power sector in India continues to show structural vulnerabilities, exacerbated by transition risks from climate change, making it imperative to address these issues promptly.
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