What’s in Today’s Article?

• Non-Banking Financial Companies Latest News
• Introduction
• IMF’s Findings on NBFC Sector Risks
• Potential Systemic Risks
• IMF Recommendations
• Impact on India’s Financial Ecosystem
• Conclusion
• Non-Banking Financial Companies FAQs

Non-Banking Financial Companies Latest News

• The International Monetary Fund has recently published a report titled “India Financial System Stability Assessment”.

Introduction

• The International Monetary Fund (IMF) has expressed concerns regarding the financial stability of India’s Non-Banking Financial Companies (NBFCs) due to their heavy exposure to the power and infrastructure sectors.
• The warning comes amid the IMF’s "India Financial System Stability Assessment" report, which highlights how the NBFC sector's interconnectedness with banks, mutual funds, and corporate bond markets could pose significant risks if distress emerges.

IMF’s Findings on NBFC Sector Risks

• The IMF report outlines key vulnerabilities within the NBFC sector:
• High Exposure to Power Sector:
  • NBFCs, particularly infrastructure financing companies, have an excessive concentration of loans in the power sector, which has been historically plagued by structural inefficiencies.
  • The three largest infrastructure financing NBFCs accounted for 63% of power sector loans in FY 2024, up from 55% in FY 2020.
• Dependence on Market Instruments and Bank Borrowings:
  • 56% of NBFC lending is financed through market instruments, making them susceptible to liquidity crises.
  • The reliance on bank borrowings has increased, raising systemic risk.
• Limited Regulatory Support Compared to Banks:
  • Unlike banks, NBFCs cannot accept demand deposits and their funds are not insured.
  • They lack direct access to RBI’s liquidity facilities, making them more vulnerable to financial shocks.

Potential Systemic Risks

• The IMF report warns that NBFC distress could have cascading effects across the financial system due to their deep interlinkages with banks, mutual funds, and corporate bond markets.
• Spillover Effect on Banks and Financial Markets:
  • Any financial distress in NBFCs could amplify stress across the banking system, leading to liquidity crises in mutual funds and bond markets.
  • Past crises, such as IL&FS and DHFL collapses, demonstrated how NBFC failures impact the broader economy.
• Regulatory Gaps for State-Owned NBFCs:
  • State-owned NBFCs dominate the sector, with three government-backed Infrastructure Financing Companies (IFCs) holding one-third of total NBFC assets.
  • Unlike private NBFCs, state-owned entities are not subjected to large exposure limits, raising regulatory concerns.

IMF Recommendations

• Strengthening Liquidity Regulations:
  • NBFCs, particularly those with significant infrastructure exposure, should comply with stricter liquidity norms to avoid asset-liability mismatches.
• Regulatory Parity Between State-Owned and Private NBFCs:
  • The IMF calls for uniform regulations for state-owned and private NBFCs to create a level playing field and enhance financial stability.
• Enhanced Data Sharing and Risk Monitoring:
  • Regular monitoring of NBFCs’ lending patterns and improved risk management frameworks are needed to prevent financial disruptions.
• Reducing Over-Reliance on Market Instruments:
  • NBFCs should diversify funding sources to reduce dependence on market instruments and bank borrowings.
• Prioritizing Financial Stability Over Developmental Motives:
  • The IMF advises the Indian government to balance financial stability with the developmental role of banks and NBFCs.

Impact on India’s Financial Ecosystem

• Despite these concerns, the IMF acknowledged India’s progress in financial inclusion and digital infrastructure. Some key highlights include:
  • 80% of adults in India have financial accounts, driven by the expansion of banking networks and digital payment systems such as UPI.
  • The rise of retail investors in equity markets has made India one of the largest global markets for options trading.
• However, the IMF stresses that financial stability risks must be managed proactively to sustain economic growth.

Conclusion

• The IMF’s cautionary report highlights serious vulnerabilities in India’s NBFC sector, particularly due to high exposure to power and infrastructure, and systemic interconnectedness with banks and financial markets.
• While India’s financial sector has made significant strides in inclusion and market depth, regulatory reforms are crucial to prevent financial disruptions and maintain long-term stability.

Non-Banking Financial Companies FAQs

Q1. Why has the IMF raised concerns about India’s NBFC sector?

Ans. The IMF has warned that NBFCs have excessive exposure to power and infrastructure sectors, making them vulnerable to financial instability.

Q2. What are the key risks associated with India’s NBFC sector?

Ans. The major risks include high exposure to power sector loans, heavy reliance on market instruments, interconnectedness with banks, and regulatory gaps for state-owned NBFCs.

Q3. How does NBFC stress impact the Indian financial system?

Ans. NBFC distress can create liquidity crises in banks, mutual funds, and bond markets, amplifying financial instability across the system.

Q4. What measures has the IMF recommended to mitigate NBFC risks?

Ans. The IMF suggests stronger liquidity regulations, regulatory parity between private and state-owned NBFCs, improved data sharing, and reduced reliance on market instruments.

Q5. How does India's financial system compare globally?

Ans. India has a diverse and well-developed financial system, with total financial assets amounting to nearly 190% of GDP, but systemic risks in the NBFC sector need to be addressed to ensure long-term stability.

Source: TH | ANI

What’s in Today’s Article?

• India River Dolphin Survey Latest News
• Key Findings of the Riverine Dolphin Survey (2021-2023)
• Survey Methodology and Challenges
• Dolphin ‘Hotspots’ and ‘Coldspots’
• India River Dolphin Survey FAQs

India River Dolphin Survey Latest News

• Prime Minister Narendra Modi released the results of India's first comprehensive population estimation of riverine dolphins. 
• Conducted between 2021 and 2023 across the Ganga and Brahmaputra basins, the survey estimated an average of 6,324 Gangetic dolphins. Only three Indus River dolphins were found in the Beas River, Punjab. 
• The study highlights threats to these endangered species, including pollution, habitat damage, prey decline, and climate change. Both species are accorded the highest protection under the Wildlife Protection Act, 1972.

Key Findings of the Riverine Dolphin Survey (2021-2023)

• This first-of-its-kind survey provides crucial insights into the status of endangered riverine dolphins and highlights the need for conservation efforts.

Survey Overview

• Conducted by the Wildlife Institute of India under the Union Environment Ministry.
• Covered 28 rivers by boat and 30 rivers by road across the Ganga, Brahmaputra, and Beas River basins.
• Surveyed 7,109 km of the Ganga and its tributaries, 1,297 km of the Brahmaputra system, and 101 km of the Beas River.

Dolphin Population Estimates

• Total Gangetic dolphins: 6,324 (range: 5,977 to 6,688).
• Ganga’s main stem: 3,275
• Ganga’s tributaries: 2,414
• Brahmaputra’s main stem: 584
• Brahmaputra’s tributaries: 51
• Indus River dolphins: Only 3, found in the Beas River, Punjab.

State-wise Distribution of Gangetic Dolphins

• Uttar Pradesh – 2,397 (highest population).
• Bihar – 2,220.
• West Bengal – 815.
• Jharkhand – 162.
• Rajasthan & Madhya Pradesh – 95.
• Punjab – 3.

Survey Methodology and Challenges

• Challenges in Dolphin Population Estimation
  • River dolphins live in turbid, opaque waters and surface only briefly, making population estimation difficult.
  • Dolphins surface for only 1.26 seconds and dive for 107 seconds, leading to:
    • Observer error – Some surfacing dolphins may be missed.
    • Availability error – Some dolphins may not surface during the counting period.
• Survey Techniques
  • Visual Surveys
    • Double Observer Method (for deep and wide channels):
    • Two teams positioned on different decks scan both sides of the vessel.
    • The boat travels at 8-10 km/hour to prevent double counting.
  • Tandem Method (for channels <600m wide, <3m deep).
  • Single Boat Method (for channels <300m wide, <2m deep).
• Acoustic Surveys
  • Uses underwater microphones (hydrophones) to detect dolphin echolocation clicks.
  • Dolphins, being functionally blind, navigate using echolocation.
  • Multiple hydrophones help triangulate dolphin locations and reduce observer error.
• This multi-method approach improves accuracy in estimating the endangered dolphin population.

Dolphin ‘Hotspots’ and ‘Coldspots’

• Coldspots – Areas with Low or No Dolphin Presence
  • Ganga River:
    • Narora to Kanpur (366 km) – Extremely low encounter rate (0.1 dolphins/km).
    • Farukkhabad-Kannauj (between Narora and Kanpur barrages) – Another coldspot.
• Other Coldspots:
  • Yamuna River (Kaushambi-Chitrakoot).
  • Sharda River (Pilibhit).
  • Rapti River (Balrampur-Siddharth Nagar).
  • Barak River (Assam).
  • Declining dolphin population in Subansiri and Kulsi rivers (Assam).
• Hotspots – Areas with High Dolphin Population
  • Uttar Pradesh – Encounter rate of 0.62 dolphins/km.
  • Bihar – Highest encounter rate of 1.62 dolphins/km, attributed to deeper river channels and tributary confluences (Ghaghara, Gandak, Kosi, Son).
• Densely Populated Stretches:
  • Chausa-Manihar (590 km) – 2.20 dolphins/km.
  • Manihari (Bihar) to Rajmahal (Jharkhand) – 2.75 dolphins/km (highest density).
  • Assam – Despite deep water in the Brahmaputra, its tributaries had low average depth, affecting dolphin population.
• The survey highlights the influence of river depth and habitat conditions on dolphin distribution, identifying key areas for conservation efforts.

India River Dolphin Survey FAQs

Q1. What is India’s first river dolphin survey?

Ans. India’s first comprehensive survey (2021-2023) estimated 6,324 Gangetic dolphins across the Ganga and Brahmaputra basins, highlighting conservation challenges.

Q2. How many Gangetic dolphins were recorded in the survey?

Ans. The survey recorded 6,324 Gangetic dolphins, with Uttar Pradesh having the highest population (2,397) and Bihar following closely (2,220).

Q3. What are dolphin hotspots and coldspots?

Ans. Bihar has the highest dolphin density (2.75/km), while Narora-Kanpur and certain Yamuna, Sharda, and Rapti river stretches are coldspots.

Q4. What methods were used in the survey?

Ans. Visual and acoustic methods, including hydrophones and observer-based techniques, ensured accurate dolphin population estimates in different river conditions.

Q5. Why is dolphin conservation important?

Ans. River dolphins face threats from pollution, habitat loss, prey depletion, and climate change, necessitating urgent conservation efforts under India’s Wildlife Protection Act.

Source: IE | DTE

What’s in Today’s Article?

• RBI foreclosure charge waiver for MSMEs Latest News
• Understanding Foreclosure Charges for MSMEs
• RBI’s Proposal
• Easing Loan Transfers for MSMEs with RBI’s Proposed Measures
• RBI foreclosure charge waiver for MSMEs FAQs

RBI foreclosure charge waiver for MSMEs Latest News

• The RBI has issued a consultation paper proposing to waive foreclosure charges and prepayment penalties on loans taken by micro and small enterprises (MSEs). Currently, such charges are not applicable to individual borrowers with floating-rate term loans. 
• The proposal aims to extend this benefit to MSEs to ensure easier and more affordable financing.

Understanding Foreclosure Charges for MSMEs

• Foreclosure charges are penalties imposed by banks when MSMEs repay their loans before the agreed-upon tenure. 
• These charges compensate lenders for the loss of interest income due to early repayment.

Types of Foreclosure Charges

• Full Prepayment Charges – Applied when the entire loan is repaid before the maturity date.
• Partial Prepayment Charges – Imposed when only a portion of the loan is paid off early.

RBI’s Proposal

• The RBI has proposed new rules to make loan repayments easier for micro and small enterprises (MSEs).

Current Status

• Currently, individuals with floating-rate loans don’t have to pay extra charges for early repayment, but this benefit is not available to businesses. 
• The RBI now wants to extend this rule to MSEs for business loans up to ₹7.5 crore. 
• However, small cooperative banks and NBFCs with assets under ₹1,000 crore are exempt.

Key Highlights of the Proposal

• No foreclosure charges or prepayment penalties on floating-rate loans for MSEs.
• Banks and NBFCs cannot set a minimum lock-in period before these benefits apply.
• No hidden or retrospective charges—borrowers must know all fees upfront.
• For loans with both fixed and floating rates, the benefit applies only when the loan is in floating-rate mode at the time of prepayment.

Easing Loan Transfers for MSMEs with RBI’s Proposed Measures

• Bringing More Borrowers into the Formal System
  • Experts believe that waiving foreclosure charges will encourage more MSMEs to take formal loans. 
  • It will also improve transparency by reducing hidden charges, helping businesses plan their cash flows better and incentivizing timely repayment.
• Current Challenges for MSMEs in Switching Loans
  • Many MSME units seek to foreclose loans, mainly to switch banks due to difficulties in obtaining additional loans from the same bank. 
  • However, some banks argue that foreclosure charges are factored into loan sanctions and should still apply to existing loans.
• Foreclosure Charges and Processing Delays
  • Industry experts described switching loans as a “nightmare” due to high foreclosure charges and long delays in paperwork. 
  • They suggest that the RBI should set a time limit for processing loan transfers to make the system more efficient for MSME borrowers.

Enhancing Financial Flexibility for MSEs

• Reducing Debt Burden for MSMEs
  • The RBI’s proposed waiver on foreclosure penalties allows small businesses to repay loans early without extra charges. 
  • While banks use these penalties to compensate for lost interest, early exits help MSMEs ease their debt burden and improve financial flexibility.
• Boosting Working Capital
  • The waiver would be extremely beneficial for MSMEs, especially for working capital loans, as many businesses prefer to repay before the due date to manage cash flow better.

Impact on Banks and NBFCs

• Consumer Benefits Leading to Industry Growth
  • Removing foreclosure charges will ultimately benefit the financial sector. 
  • Similar waiver for retail loans was well-received by consumers, and extending it to SME loans could have a positive impact.
• Profitability Concerns for NBFCs and Banks
  • A report warns that the proposed measures could reduce profits for financial products like loans against property (LAP), SME loans, and business loans. 
  • The increased ease of loan transfers may intensify competition, affecting the revenue of banks and NBFCs.
• Increased Competition in the Loan Market
  • Although affordable housing finance companies (AHFCs) are not covered under the RBI’s circular, the report suggests that competitiveness in the non-housing loan (NHL) segment could rise over time. 
  • Large NBFCs may adjust interest rates to compete more aggressively in the market.

Challenges MSMEs Face in Availing Foreclosure Charge Waivers

• Lack of Awareness
  • Many MSMEs are unaware of the RBI’s foreclosure charge waiver guidelines. 
• Documentation Issues
  • MSMEs may struggle to gather the necessary documents to prove eligibility for the waiver. 
  • This could lead to delays or businesses completely overlooking the benefit.
• Bureaucratic and Operational Hurdles
  • Complex procedures and bureaucratic red tape can make it difficult for MSMEs to avail the waiver. 
  • This may lead to frustration and added financial strain for businesses.

RBI foreclosure charge waiver for MSMEs FAQs

Q1. What is RBI’s foreclosure charge waiver proposal for MSMEs?

Ans. RBI proposes removing foreclosure charges on floating-rate loans up to ₹7.5 crore for micro and small enterprises (MSEs).

Q2. Why is RBI waiving foreclosure charges for MSMEs?

Ans. To improve financial flexibility, reduce debt burden, and encourage MSMEs to take formal loans without penalty for early repayment.

Q3. How will MSMEs benefit from the foreclosure charge waiver?

Ans. MSMEs can switch lenders easily, reduce loan costs, and improve cash flow management without penalties for early loan repayment.

Q4. What challenges do MSMEs face in availing foreclosure waivers?

Ans. Lack of awareness, complex documentation, and bureaucratic hurdles make it difficult for MSMEs to claim foreclosure charge waivers.

Q5. How will banks and NBFCs be affected by the RBI’s proposal?

Ans. Increased competition may reduce profitability for banks and NBFCs, but it will enhance transparency and market efficiency.

Source: TH | ET | IIFL