“To date, RBI crisis measures have been implemented indirectly through banks and the G-SEC purchase program,” IMF said in a report based on its financial sector assessment program.
“The RBI should establish ex-ante guideline to be operationally prepared to accept certain collateral beyond G-SECs (government securities or bonds) in crisis times, such as corporate bonds subject to appropriate haircuts.”
The report, which was released on Friday, said that while banks have significant G-SECs, future systemic liquidity distress could emerge in other securities, repos, and derivatives markets and, mainly pressure non-bank financial institutions that may not have much government securities.
In such cases, providing liquidity support to banks with a broader set of eligible collaterals can incentivize them to on-lend to NBFIs with non-G-SEC collaterals. “Credit risks can be managed better once securitization, especially covered bonds with overcollateralization takes off.”
The report also said that RBI’s scale-based regulations for NBFCs has helped oversee the diverse industry with about 9,500 entities. However, exemptions for state-owned NBFCs from prudential standards should be eliminated to level the playing field and safeguard financial stability, particularly as some of the largest NBFCs, which are heavily exposed to the vulnerable power sector, are state owned.
