The government wants the Reserve Bank of India to set up a fund to buy out stressed assets of the country’s top 25 shadow lenders and revive the financial sector, a government source told reporters on Thursday.
The shadow banking sector has been battling a credit crunch ever since one of the sector’s biggest firms, Infrastructure Leasing & Financial Services, collapsed in late 2018 amid fraud allegations.
The finance ministry has proposed a bailout plan on the lines of the US Troubled Asset Relief Programme following the 2008 financial crisis to pull India’s financial sector out of a deep slump and get credit flowing back into a weak economy, the source told a group of reporters.
“Talks are on and various rounds of discussions have happened with the central bank on a mini TARP-like programme,” the source who is involved in the discussions told reporters.
“The RBI could be the buyer of last resort,” the source, who cannot be named in line with his service rules, said.
In 2008, the United States treasury department had worked out a $700-billion bailout plan to address the financial crisis.
India’s government has been considering measures to revive the financial sector to boost economic growth after five straight quarters of declines.
A further decline in the growth rate is forecast for the July-September period in data due to be out on Friday.
Shadow lenders account for a large chunk of India’s credit market, accounting for a 30 per cent share of auto loans and more than 40 per cent of home loans as of December 2018, according to the central bank.
The government official said that the RBI has been reluctant to open its balance sheet for a large bailout programme for the shadow banks as it feels the step is too drastic and more discussions are required.
The RBI declined to comment on the government source’s remarks.
Any new measure is likely to help NBFCs such as Indiabulls Housing Finance, Piramal Enterprises, Reliance Capital, Shriram Transport Finance and Mahindra & Mahindra Financial Services.
Shares of Piramal rose nearly 5 per cent to Rs 1,830.70 a share, while Shriram Transport Finance company rose 1.3 per cent to 1,155 a piece from Rs 1,140, after the news before paring some gains.
