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Background

• A public-private partnership is a government service or private business venture that is funded and operated through a partnership of government and one or more private sector companies.
• PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project
• Public Private Partnerships (PPPs) in infrastructure refer to the provision of a public asset and service by a private partner who has been conceded the right (the “Concession”) for the purpose, for a specified period of time, on the basis of market determined revenue streams, that allow for commercial return on investment.
• PPPs in infrastructure represent a valuable instrument to speed up infrastructure development in India. This speeding up is urgently required for India to grow rapidly and generate a demographic dividend for itself and also to tap into the large pool of pension and institutional funds from aging populations in the developed countries.
• India offers today the world’s largest market for PPPs. It has accumulated a wealth of experience in getting to this premiere position. As the PPP market in infrastructure matures in India, new challenges and opportunities have emerged and will continue to emerge.

Models of PPP

Following are the main models of PPPs.

(a) Build Operate and Transfer (BOT): This is the simple and conventional PPP model where the private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector. Role of the private sector partner is to bring the finance for the project and take the responsibility to construct and maintain it. In return, the public sector will allow it to collect revenue from the users. The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model.

(b) Build-Own-Operate (BOO): This is a variant of the BOT and the difference is that the ownership of the newly built facility will rest with the private party here.The public sector partner agrees to ‘purchase’ the goods and services produced by the project on mutually agreed terms and conditions.

(c) Build-Own-Operate-Transfer (BOOT): This is also on the lines of BOT. After the negotiated period of time, the infrastructure asset is transferred to the government or to the private operator. This approach has been used for the development of highways and ports.

(d) Build-Operate-Lease-Transfer (BOLT): In this approach, the government gives a concession to a private entity to build a facility (and possibly design it as well), own the facility, lease the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.

(e) Lease-Develop-Operate (LDO): Here, the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter. This approach is mostly followed in the development of airport facilities.

(f) Rehabilitate-Operate-Transfer (ROT): Under this approach, the governments/local bodies allow private promoters to rehabilitate and operate a facility during a concession period. After the concession period, the project is transferred back to governments/local bodies.

(g) DBFO (Design, Build, Finance and Operate): In this model, the private party assumes the entire responsibility for the design, construction, finance, and operate the project for the period of concession. The private party assumes the entire responsibility for the design, construct, finance, and operate or operate and maintain the project for the period of concession.

(i) Management contract: Here, the private promoter has the responsibility for a full range of investment, operation and maintenance functions. He has the authority to make daily management decisions under a profit-sharing or fixed-fee arrangement.

(j) Service contract: This approach is less focused than the management contract. In this approach, the private promoter performs a particular operational or maintenance function for a fee over a specified period of time.

(h) Swiss Challenge– Under this method the government keeps an unsolicited bid in public domain and invites others to come up with better or improved ones within a given time-frame. The unsolicited bidder is a private player who approaches the government for development of a new infrastructure project.

(k) Joint Venture (PPP): Under this model the infrastructure is co-owned and operated by the public sector and private operators instead of fully privatise the project. The public and private sector partners can either form a new company (SPV) or assume joint ownership of an existing company through a sale of shares to one or several private investors.

Why is PPP needed?

• The ever-increasing growth in population has imposed tremendous pressure on State resources. In this situation, public-private partnership (PPP) can offer a solution to resource scarcity by taking an associated risk of infrastructure.
• It intends to bring expertise and efficiency in terms of human resources, technology and innovation.
• It can provide the room for the government to focus on essential service delivery such as education and health.
• PPP as long-term investment build the internal competition amongst the private players, thereby promoting the economic growth in long run.

Issues with PPPs

Over the past few years, a number of public private partnership (PPP) projects across various sectors have been in a stalled state (Economic Survey 2015). Further, private investment under the PPP investment model has failed to come by due to various reasons. An examination of various reasons for issues plaguing PPPs is as follows:

• According to Economic Survey-2015, many companies have been “over-leveraging” i.e. bidding beyond capacity and expecting government to redraw contracts
• Finance-The long term finance for PPP projects has dried up due to excessive dependance on banks and lack of proper corporate bond market in the country. Banks are further stressed due to high NPAs and governance issues.
• Clearance issues for projects – land acquisition and environmental clearances for projects have been difficult to come by
• According to Economic Survey 2015, PPPs have certain inherent flaws in design due to which they have been stalled eventually- no re-negotiation structures; wrongful risk allocation; lack of focus of efficient service provision
  • Focus on fiscal benefits rather than efficient service provision; no measures to penalise the providers for poor service
    • Bidders giving highest revenue share to govt win the contract
  • Neglect the principle of allocating risk to the agency best able to manage it eg traffic risks
  • No ex-ante renegotiation structures; failed projects don’t lead to investigations against bureaucrats while re-negotiated projects might do so.

Vijay Kelkar Committee on PPP

Recommendations of the committee

• Ministry of Finance should develop and publish a national PPP Policy document and 3PI institution which can function as a centre of excellence, enable research, and review and roll out activities to build capacity.
• Infrastructure PPP Project Review Committee (“IPRC”) and Infrastructure PPP Adjudication Tribunal (“IPAT”) should be established to ease the bottlenecks in PPP projects.
• Amend the Prevention of Corruption Act, 1988 to distinguish between genuine errors in decision-making and acts of corruption.
• Encouraging the banks and financial institution to issue Deep Discount Bonds or Zero Coupon Bonds (ZCB) for PPP.
• Monetisation of viable projects that have stable revenue flows after EPC delivery should be considered.
• Concession agreement should stipulate important commercial parameters like return on equity, treatment of land for noncommercial purposes.
• Open the avenues for long-term investors, including overseas institutional investors as long-term liabilities are best suited for PPP.
• Protection against ‘Obsolescing Bargain’ – loss of bargaining power by private players in PPP over the long time-frame of the project due to abrupt changes in policy or economic environment

Problems and Solutions- Sector specific problem of PPP, highlighted by CAG and its solution recommended by Kelkar Committee

Other government interventions

Hybrid annuity model

• The hybrid model is actually a mix of Engineering, Procurement and Construction(EPC) and BOT models
• In the annuity type, the concessionaire gets a fixed and assured payment from the government. The assured return balances the risk of insufficient revenues for the developer. Further, the government shoulders the responsibility of revenue collection.
• Also, the government pays 40% of the project cost to the concessionaire during the construction phase in five equal instalments of 8% each
• The government will provide 90% of land and the related environmental and forest clearance
• The operation and maintenance of the toll road rests with the concessionaire.
• The model goes a long way in shielding the risks for the developer and attracting funding to the infrastructure sector which is facing shortfall of funds in the recent years.
• The model has achieved considerable success, leading to increase in the average bidders for projects by 3 times.

Way forward

• The Vijay Kelkar committee on PPP restructuring suggests some forward-looking and viable steps for the regime. Some of the recommendations such as encouraging 3PI to be a centre of excellence, model concession agreements, optimum risk allocation and independent regulators for each sector will go a long way in addressing the problems plaguing the PPP projects.
• Further, there is dire need for a independent project renegotiation structure for negotiating stalled PPP projects.
• The Kelkar committee has suggested exploring various mechanisms for finance of PPP projects. Some other measures maybe to simplify corporate debt market regulation and explore other financing alternatives- corporate bonds; pension funds etc
• Further, there is a need for better exit options- bankruptcy codes, asset reconstruction etc
• Also, according to economic survey 2015, Highway tolls should have correlation between
  • reasonable profit for the private player
  • users’ capacity to pay
  • measures such as traffic triggers and re-equilibrium discount should be employed to ensure quality service at the same time.

The draft National PPP policy sets several objectives for PPPs

1. Harnessing private sector efficiencies in asset creation, maintenance, and service delivery
2. Providing focus on a lifecycle approach for development of a project, involving asset creation.
3. Creating opportunities to attract innovations and technological improvements.
4. Availability of affordable and improved services to the users in a responsible and sustainable manner.

CONCLUSION

A mature PPP framework, along with a robust enabling ecosystem shall enable the Government to accomplish, to a considerable extent, what our Prime Minister, Shri. Narendra Modi has said “The Government has no business to do business” and thereby promote private sector investments and participation towards the nation building.

Context

• The conflict between people and wildlife has attained serious dimensions in many regions of the country to the detriment of conservation. Wild animals often stray in villages and farms in and around protected areas and sanctuaries, causing bloody conflicts.
• And now increasingly we are seeing wild animals wander into urban areas causing human-animal conflicts.

What is a man-animal conflict?

• It refers to the interaction between wild animals and people and the resultant negative impact on people or their resources, or wild animals or their habitat.
• It occurs when wildlife needs overlap with those of human populations, creating costs to residents and wild animals.

Causes of Man-Animal Conflicts

• Habitat fragmentation and shrinking of habitat give rise to shrinking of space, food etc. in the forest which is required for the wild animals which result in animals stray out of habitat in search of food, water or shelter.

This habitat fragmentation may be result of many reasons, for example, Construction of roads especially big Highways and canals passing through dense jungles and the big mines.

• Encroachment in the forest lands by local people has resulted in shrinkage of wildlife habitats especially on the fringes which has increased the pressure on the limited natural resources in the forest areas.
• Increased disturbance due to collection of fuel wood, fodder, NTFPs, water etc. from the forests has also increased the incidences of man-animal conflict.
• Increase in area under cultivation around wildlife habitats and changed cropping pattern have also contributed to increased man-animal conflict. People have started growing commercial crops like sugarcane and banana, which provide good hiding place for the wild animals like wild boar, sloth bear and panther.
• It is observed that the local people have to go deeper and deeper, year by year for fetching firewood and other forest produce for their bonafide use, because of degradation of forests in the fringes. This has increased the number of incidences of man-animal conflict.
• Infestation of wildlife habitat by the invasive exotic weeds like Lantana, Eupatorium and Parthenium have resulted in decreased availability of edible grasses for the wild herbivores. As a result, herbivores come out of forest area and cause depredation of agricultural crops on the fringes.
• Monoculture of teak in the large scale forest plantations raised by the Forest Development Corporation of Maharashtra Ltd (FDCM) has also adversely affected the wildlife habitat value of the forest areas.
• Most incidences of man-animal conflicts are noticed during summer when water becomes scarce. The livestock and wild animals have to share the limited water sources on the fringes or inside forest. Human interference with the natural drainage system in forest areas and diversion of water towards habitation has further complicated the issue.
• In some forest areas, the number of wild animals especially prolific breeders like wild pig has increased beyond the carrying capacity of the habitat concerned. Hence wild animals stray out of forests cause man-animal conflict.
• Decreased prey base caused by poaching of herbivores has resulted in carnivores moving out of forest in search of prey and indulge in cattle lifting.
• Sometimes the wild animals and human come in sudden contact and out of fear of each other, they harm each other accidently.

Results of Human-Wildlife Conflict

• Scientists at Bengaluru’s Centre for Wildlife Studies, who analysed cases of compensation for crop raiding, livestock loss and human injury and death reported to the government between 2010 to 2015, find that wildlife that caused losses in 29 States included elephants that raid crop fields, tigers and leopards that preyed on cows and goats, and other species ranging from crocodiles to monkeys that cause injury and property damage. Twenty-two States compensated people for crop loss.
• While a majority of the States awarded compensation for loss of livestock, human injury and death, only 18 (62%) did so for property damage. The complete data for 18 States in 2012-2013 alone reveals that people reported a total of 78,656 cases, for which payments totalled to about ₹ 38 crores.
• Yet, even these numbers are an underestimate of the extent of conflict: many people do not report their losses, some States lack compensation policies, and the team did not have access to the five-year compensation details of 11 other States.
• When the team compared the compensation patterns in detail, they found that despite a significant mandate to address human-wildlife conflict, there exist numerous inconsistencies in eligibility, application, assessment, implementation and payment procedures across States.
• For instance, although the majority of claims countrywide were related to crop loss, seven States — including Gujarat and Rajasthan — still do not provide crop compensation.
• The ramifications of losses in arid States where farmers rely on just a single crop for survival would be high. Such discrepancies in eligibility and procedure, by promoting selective tolerance and protection of wildlife, could be detrimental to conservation efforts,

Mitigation measures of Man-Animal Conflict

• To control poaching: Poaching of wild animals should be stopped so that the no of wild animals can stabilize at its carrying capacity which would reach equilibrium in the ecosystem and this equilibrium between the numbers of prey animals and predators in the forest ecosystem would be maintained.
• To undertake SMC works in the habitat: To stop soil erosion and to increase water availability in the forests, soil and moisture conservation measures (SMC) like vegetative checks dams, loose boulder check-dams, cement plugs, Nala bunding, water tanks, should be taken in the forest so that water regime of the forest is increased in a natural way which will increase the productivity of the forests as well as water availability in the habitat. Then the sufficient food and water for wildlife will be available and the number of animals straying out of forest will be controlled.
• To stop monoculture and increase number of edibles miscellaneous species: Plant monoculture of species like teak should be avoided. Instead mixed plantations of miscellaneous, bamboo and fruit species can be considered. This will provide more food for animals in the forest, hiding shelter to animals as well as provide food for most herbivores.
• Stop fragmentation of wildlife habitat and wildlife corridors: While going for construction of dams, long canals for irrigation and Highways through the forest areas, the fragmentation of wildlife habitat should be avoided and proper care should be taken so that the connectivity through wildlife corridors is not disturbed.
• Animals cannot pass these canals and roads easily and they are localized and their natural balance is disturbed. Big mines can also fragment the habitat hence to be avoided. The corridors of wildlife joining one habitat with nearby habitat which is essential for their sustenance should be maintained.
• Providing LPG to villagers: LPG should be provided to those villagers who frequently go to the forest areas specially wildlife habitats to fetch fuel wood for their chullahs so that they may stop penetrating into forest and stop inviting Man- Animal Conflicts. These people are most vulnerable to Man-Animal Conflicts.
• Maharashtra Forest Department has started in big way to distribute LPG to villagers residing on the fringes under Joint Forest Management Program and Village Eco-development Program which will go a long way simultaneously to conserve forests and wildlife o and to reduce man animal conflicts.
• Awareness Raising: People should be made more and more aware through meetings and pamphlets etc. that they should avoid going deep into the forest areas. If they have to go in any case they should go in groups and they should keep talking to each other to detract the wild animals. School children in vulnerable villages should be educated about the importance of wildlife and human co-existence with it.
• Solar Fencing around agriculture fields: Agriculture fields situated near wildlife habitat/forest areas can be protected by stone fencing or solar fencing. Solar fencing has been tried with quite good effect in Wardha District of Maharashtra. The District Planning and Development committee is ready to give financial support to the farmers for erecting solar fencing.
• Controlling crop pattern: Crops like sugarcane, Banana, Bajra, tuhar should not be allowed to be grown near forest areas. These crops attract wildlife for food as well as good hiding place.
• Paying Ex-gratia/Compensation to the people: Ex-gratia /compensation should be paid promptly to the victims of wildlife attack so that the people will not become enemy of the wild animals. Otherwise people tend to take revenge from the wild animals by killing them by poison, trap, hacking or shooting as has been noticed in many cases.
• Relocation/Rehabilitation of problematic and disadvantaged wild animal: If a wild animal like tiger, panther, or bear has become disadvantaged or problematic, this fact to be doubly confirmed and then only such animal should be caught either by tranquilization or by trapping cages, safely. Then it should be relocated in suitable habitat or be kept in a zoo or rescue centers for all its remaining life.
• However, it is not advisable to keep the stressed problematic animal to be released near the problem area where people may harm that animal. It is better to relocate this kind of animals by following the prescribed protocols in this regard.

What’s being ignored?

Enough attention has not always been given on the mental health of people who are the victims of the human-wildlife conflict. Given that incidents of human-wildlife conflict occur in such large numbers across India, its impact on the mental well-being of victims has largely been peripheral to the conservation discourse.

• However, these conflicts often magnify pre-existing financial problems or untreated mental disorders. In some cases, they may even generate new psychiatric morbidities or impact maternal health.
• Both experts emphasize the need for a sustained interaction between conservationists and public health professionals as a way forward.

Way ahead

The solutions are often specific to the species or area concerned and are often creative and simple. Solutions should lead to mutually beneficial co-existence.

Apart from the above-mentioned measures, the WWF report ‘Common Ground’ identifies themes that can be used to compose a common ground or a basic list of available and tested solutions.

These include:

• A united effort: In order to be truly effective, prevention of human-wildlife conflict has to involve the full scope of society: international organizations, governments, NGOs, communities, consumers and individuals. Solutions are possible, but often they also need to have financial backing for their support and development.
• Community-based natural resource management: The local community is key since they are the ones who may wake up in the morning with a tiger or bear in their back yard. But they are also the people who can benefit the most from this. If people are empowered to manage their relationship with wild animals, these “unwanted” neighbours can become allies in bringing income and promoting a better quality of life for all.
• Payment for Environmental Services: Payment for Environmental Services (PES) is a concept that has recently gained popularity in the international development and conservation community. The most popular of these is financial reward for the sequestering of carbon, but it is also seen as a potential solution for human-wildlife conflict.
• Wildlife friendly products: Consumers is distant countries also have a role to play. Always look for products that are environmentally friendly and recognized by serious organizations.
• Field based solutions: There are a number of practical field-based solutions that can limit the damage done both to humans and human property, and to wildlife, by preventing wildlife from entering fields or villages. However, such solutions can only be applied on a case-by-case basis. What people see as solution in one place, they may resist in another. And what works in one place, may have the opposite effect somewhere else.

CONTEXT

• India’s non-banking financial companies (NBFC) sector — also known as the shadow banking system that provides services similar to traditional commercial banks but outside normal banking regulations — is passing through a turbulent period following a series of defaults by Infrastructure Leasing and Financial Services (IL&FS) and the subsequent liquidity crunch.
• The liquidity squeeze faced by NBFCs has led to a conflict between the government and the Reserve Bank of India, with the Finance Ministry pushing for easier fund flows while the RBI insists there’s enough money available in the system.

What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

A non-banking institution which is a company and has a principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company).

Features of NBFCs

• NBFC cannot accept demand deposits.
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.

Major difference between Banks and NBFCs

Importance of NBFCs

• NBFCs help attain the objective of macroeconomic policies of creating more jobs in the country by promoting Small and Medium scale Enterprises and private industries through lending them loans.
• The financial market relies heavily on non-banking financial institutions for raising capital. The start-ups and small-sized businesses are dependent on funds offered by NBFCs.
• NBFCs extend long-term credits to infrastructure, commerce and trade companies. The traditional banks expect timely, schedules and short-term repayment of loans that may not always suit the requirements of these industries.
• Non-banking financial companies help in rotation of resources, asset distribution and regulation of income to shape the economic development. They enable converting savings into investments and thus, helps in the mobilisation of funds/resources in the economy.
• NBFCs play an important role in promoting inclusive growth in the country, by catering to the diverse financial needs of bank-excluded customers. And very importantly, they also reach out to areas inaccessible to regular banking.
• As NBFCs aim to build capital for several industries – private and otherwise – they aid in accumulating a capital stock for the country. This directly adds on to the National Income and results in the progression of Gross Domestic Product (GDP).
• With quicker decision-making ability and prompt provision of services, NBFCs act as not just complements but also substitutes to banks.

How big is the NBFC industry?

• NBFCs have been slowly moving into the space of commercial banking. When banks slowed down their lending business in the wake of huge bad loans, NBFCs continued to grow at a higher pace.
• As of March 2018, there were 11,402 NBFCs registered with the RBI, of which 156 were deposit accepting NBFCs (NBFCs-D), and 249 systemically important non-deposit accepting NBFCs (NBFCs-ND-SI).
• The aggregate balance sheet size of the NBFC sector as of March 2018 was Rs 22.1 lakh crore. There was a deceleration in share capital growth of NBFCs in 2017-18 whereas borrowings grew at 19.1%.
• NBFCs in India include not just finance companies, but also a wider group of companies that are engaged in investment, insurance, chit fund, nidhi, merchant banking, stock broking, alternative investments etc. as their principal business.
• NBFCs being financial intermediaries are supposed to play a supplementary role to banks. NBFCs, especially those catering to the urban and rural poor — including the micro-finance institutions (NBFC-MFIs) and asset finance companies — have a complementary role in the financial inclusion agenda of the country.
• Further, some of the big NBFCs — infrastructure finance companies — are engaged in lending exclusively to the infrastructure sector, and some are into factoring business, thereby giving a fillip to the growth and development of various sectors. In short, NBFCs bring diversity to the financial sector.

What’s the fund source of NBFCs?

• NBFCs were the largest net borrowers of funds from the financial system, with gross payables (loans) of around Rs 717,000 crore and gross receivables of around Rs 419,000 crore in March 2018.
• A breakup of gross payables indicates that the highest funds were received from banks (44%), followed by mutual funds (33%) and insurance companies (19%). HFCs were the second largest borrowers with gross payables of around Rs 528,400 crore and gross receivables of only Rs 31,200 crore.
• As of March 2018, HFCs’ borrowing pattern was quite similar to that of NBFCs except that financial institutions also played a significant role in providing funds to HFCs. Like NBFCs, long-term debt, loans and CPs were the top three instruments through which HFCs raised funds from the financial markets.
• Now with the system facing a liquidity crunch, mutual funds, insurance companies and other big investors are unlikely to invest in NBFCs in a big way. The exposure of banks to NBFCs had shot up by 27%, or over Rs 1 lakh crore, to Rs 496,400 crore in a span of six weeks in March 2018.
• However, banks started cutting their exposure since April this year, leading to a 4.6% decline in their exposure to NBFCs, according to RBI data. The outstanding credit of banks was at Rs 391,000 crore in March 2017. The sudden spike in bank exposure to NBFCs prompted the RBI to direct banks to bring down the exposure.

What is the crisis in the NBFC sector?

• Several corporates, mutual funds and insurance companies had invested in short-term instruments such as commercial papers (CPs) and non-convertible debentures (NCDs) of the IL&FS group that has been defaulting on payments since August.
• This has stoked fears that many of them could have funds stuck in IL&FS debt instruments which, in turn, could lead to a liquidity crunch in their own backyard. Liquidity conditions had tightened, with a deficit of Rs 1.37 lakh crore on October 22, 2018, though this has declined since.
• There are rising fears that the funding cost for NBFCs will zoom and result in a sharp decline in their margins.

Problems Plaguing NBFCs

• The decline in asset quality for select NBFCs has stemmed from cases where underwriters (a person or company that underwrites an insurance risk) are inexperienced, or with limited understanding of the local situation and dynamics that drive the demand for credit.
• Misalignment in product offerings with customer needs: Small NBFCs, in an effort to capture markets, have expanded into new geographic locations and diversified their product portfolio but are misaligned with consumer needs. When products can’t get associated with consumer needs, they become outmoded.
• Asset-liability mismatch: Several NBFCs are faced with a liquidity crunch (a time when cash resources are in short supply and demand is high), liabilities maturing and coming up for payment faster than loans in the same tenure.
• Lack of a strong regulator, except for housing finance companies, is also one of the challenges faced by NBFCs.

There are three primary drivers of the current risk aversion for NBFCs

The first driver relates to short-term funding being used to finance long-term assets—an asset-liability mismatch (ALM).

• For micro-finance, the average loan tenure ranges from eight to nine months, for commercial vehicle finance it is 16 to 18 months, while for small business finance it is 12 to 16 months. Thus, the asset side duration for these businesses is very short.
• On the liabilities side, the duration either mirrors the asset side, or is longer, and generally ranges from one to two years. Thus, these small to mid-sized NBFCs run a positive ALM mismatch.
• Even in the case of affordable housing finance, where one would expect a wide ALM mismatch, low asset duration for affordable housing financiers reduces the ALM gap to negligible. This is further aided by low leverage (debt to equity ratio) and high capital adequacy.

The second cause of current risk aversion towards NBFCs has to do with refinancing or rollover of short-term capital market borrowings.

• This concern is linked to the ALM issue, as a smooth rollover of shorter duration liabilities when assets are of longer duration is key for business continuity.

The third cause for concern has to do with asset quality.

• • This primarily pertains to exposure of NBFCs to the real estate sector—either as builder funding or loan against property (LAP).

What did the RBI do to provide liquidity?

• The Reserve Bank of India (RBI) has decided to increase the single-borrower exposure limit of banks for non-banking finance companies (NBFCs) which do not finance infrastructure, to 15% from the existing 10% of their capital funds.
• This would be effective till December 31. This is taken in the context of the IL&FS imbroglio-induced liquidity crisis in the system.

  The Reserve Bank has also permitted banks to use government securities, equal to their incremental outstanding credit to NBFCs, over and above their outstanding credit to them as on October 19th to meet the liquidity coverage ratio requirement.

Way Forward

• Efficient engagement of customers: NBFCs must distinguish between active and inactive customers to develop a focused engagement methodology and allocate resources efficiently.
• Building effective reward and loyalty programmes to minimise bad debts: NBFCs must increase customer retention by building a strong loyalty programme, with discount, cashback benefits. The program must be customised according to the customer type and factor in the right data variables to provide meaningful incentives and value for customer loyalty.
• Over the years, NBFCs have played an important role in providing growth capital to various sectors of the economy
• A concerted effort across stakeholders is required to prevent a market contagion that can cut off the critical supply of capital to the grassroots of the nation.