02 January, 2020
4 Min Read
Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Prelims and Mains focus: About the liquidity crisis in the NBFC sectors and efforts of RBI to improve the liquidity situation
News: The Reserve Bank of India (RBI) has extended by six months existing relaxations for securitization of assets by non-banking financial companies (NBFCs).
Aim of the move
The move is aimed at providing NBFCs with some more breathing space to repair their balance sheets by selling assets and improving liquidity.
What is MHP?
The minimum holding period is the duration for which an NBFC is required to hold the loans on its book before selling them.
Efforts made by the RBI to improve liquidity in NBFCs
The Non-Banking Financial Companies (NBFCs) are the financial institutions that offer the banking services, but do not comply with the legal definition of a bank, i.e. it does not hold a bank license.
Both banks and NBFCs are financial intermediaries. NBFCs can lend and make investments. Hence, their activities are akin to that of banks.
However, there are a few differences between NBFCs and banks:
Significance of NBFCs
Non-banking finance companies (NBFCs) are a fundamental part of the Indian financial system playing a significant role in nation building and financial inclusion. It plays a complementary role to the banking system in promoting financial inclusion. There are multiple varieties of NBFCs and so the sector demands a well-coordinated response from all stakeholders keeping in mind the differential contextual requirements of different categories of NBFCs.
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