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Financial Sector

Mains -GS3- Economic Development

What are the issues?

1. The growth rate for the fourth quarter of 2018-19 is below 7%.

2. Non-Banking Financial Institutions (NBFCs) crises have worsened the liquidity scenario in the sector, which has meant many of these companies virtually stopping disbursal of fresh loans.

3. After the IL&FS group started defaulting on its aggregate debt of over Rs 90,000 crore since September 2018, financial sector entities including NBFCs, mutual funds, corporate-focused lenders have faced liquidity challenges.

4. The situation further worsened as rating agencies started downgrading debt papers issued by NBFCs, thereby weakening their ability to raise funds to do business.

5. These issues will need the attention of both the government and the RBI.

Which are immediate challenges of the Finance Ministry?

1. Finding resources for investments in infrastructure.

2. Injection of fresh capital in banks and providing support to liquidity starved NBFCs in the upcoming budget.

3. On the revenue front, there has been a substantial shortfall from targets of direct tax in the last financial year, which would result in a reduction of targets in the current year.

4. The Goods and Service Tax (GST) collection target is being seen as challenging to meet in the current financial year.

Where Finance ministry has been focusing?

1. The key theme of the upcoming budget is creating fiscal space for capital investment of around Rs 25 lakh crore annually in the infrastructure sector.

2. The government is also working on a new industrial policy with a specific focus on technology and the MSMEs sector.

3. The government has formed a task force to draft new direct tax law and review the Income-tax Act, however, the task force has taken a further extension, therefore major direct tax reforms are unlikely this year.

Why Finance ministry is looking for RBI support?

1. Due to the tight fiscal situation, the government may need the support of the Reserve Bank of India, in addressing liquidity issues of NBFCs.

2. The central bank is also expected to address the liquidity issue when it meets for its second bi-monthly monetary policy review on June 6.

3. The RBI has not shown keenness for a special liquidity window for NBFCs, but there is a possibility of more liquidity-boosting measures and a possible easing of the stance.

4. It is the last such space to act ahead of an unexpected and inexplicable monsoon and its consequent impact on inflation.

Bimal Jalan Committee

1. A committee headed by former RBI Governor Bimal Jalan, on the issue of determining appropriate capital reserves for the RBI, it is expected to submit its report soon.

2. Bank of America Merrill Lynch estimated the Jalan committee is expected to identify an excess buffer of up to Rs 3 lakh crore, this includes the excess capital in contingency reserves and also revaluation reserves

3. According to the estimates, the RBI’s excess capital is pegged at Rs 1-3 lakh crore. If the panel suggests transferring of past excess reserves, this could provide a booster dose of funds that can be used to capitalize banks. 

Source: The Indian Express