There is an "imminent crisis" in the non-banking financial companies (NBFCs) sector as misadventures by some large entities and credit squeeze present a perfect recipe for disaster, a senior government official has said.
In recent months, the country's financial system has been grappling with multiple woes in the wake of the turmoil at diversified IL&FS group as well as debt defaults by some other large entities.
In an interview, Corporate Affairs Secretary Injeti Srinivas said the NBFC sector is facing issues of credit squeeze, over-leveraging, and misadventures by some large entities.
"There is an imminent crisis in the NBFC sector. There is a credit squeeze, over-leveraging, excessive concentration, massive mismatch between assets and liabilities, coupled with some misadventures by some very large entities, which is a perfect recipe for disaster," Srinivas said.
However, he added that "responsible" companies are managing the risk well and are not facing such a dire situation.
Srinivas also said corporate governance in India is being put to test.
"It is a defining moment. The way things are moving, in the medium to long term it will be for the good. In the short term, there can be turbulence," he said.
"If you are responsible, you manage the risks. There are many companies in the country that have strong corporate governance. They take risks but manage them as well. So, they don't face such dire situation that some others are facing today," Srinivas said.
Amid instances of the situation of non-performing assets (NPAs) being linked to external factors, Srinivas noted that it would not be a convincing explanation.
"To say that the situation (NPA) can be attributed entirely to external factors and business risks is not a convincing answer because there is something known as responsible behaviour," he emphasised.
Earlier this month, former Prime Minister Manmohan Singh said the banking sector is "under severe stress" and the way out of "this mess" is to reverse some "gross distortions", work closely with the RBI, re-start the process of credit delivery and ensure sufficient liquidity and cash in circulation.
The NPA "scare" has brought lending to a virtual halt, the former prime minister had said, adding that a "one-size-fits-all approach" drove companies into insolvency while demonetisation shut out all sources of informal credit.