NBFC sector needs an asset quality review, says Arvind Subramanian

New Delhi: Former Chief Economic Adviser Arvind Subramanian has said that the time is ripe for a health assessment of Non-banking finance companies (NBFCs) which are facing liquidity challenges. He added that an asset quality review (AQR) will help to know the stress level and to work on solutions for them.

'AQR necessary to assess the health of the NBFC sector'

During a panel discussion organised by the Asia Society at the launch of his book, Of Counsel – the challenges of Modi-Jaitley economy, he said that the AQR for banks (in 2015-16) had an important positive effect as it brought the issues infecting the sector into light and lenders couldn't hide the problem. "If you hide the problem, you also can't galvanise the political will to address it," he said.

Subramanian, who is now a professor at Harvard University in the US, said that an AQR for NBFCs, including housing finance companies (HFCs), is necessary given the uncertainty over non-performing assets (NPAs).

"There may be a push back to it AQR. The IL&FS group defaults were representative of what lies beneath. Think of the quality of the oversight that we did not know about the monster," he said.

'All regulators need to cooperate with each other'

Holding the system, the government and the Reserve Bank of India (RBI) responsible for doing an AQR for NBFCs, Subramanian said, "I had come out with 4Rs — recognition, resolution, recapitalisation and reform — for the banking system and had come up with the Subramanian law of non-recognition. That law states that at every point in time, bad assets are 20-30 per cent higher than what you think they are. This (AQR for NBFCs) will require cooperation by all regulators, the government, National Housing Bank and the RBI."

On being asked about the scale at which this exercise should be undertaken, given the fact that there are over 2,000 NBFCs and HFCs, with asset under management of over Rs 2-3 billion, Subramanian said, "I think they will have to restrict it to a manageable size. In the short-run, the markets may be affected, but it will help address what they are worried about, which is why we need transparency."