Small firms with poor financials in “vulnerable position”, says RBI report

These firms stand in need of funding sources in order to arrest the next wave of non-performing assets (NPAs).

Small and medium-sized firms with poor financials are in a “vulnerable situation”, according to a RBI report. These firms stand in need of funding sources in order to arrest the next wave of non-performing assets (NPAs).

“Small and medium-scale firms in India with sound financial health have indeed shifted to non-bank funding through bonds and CP (commercial paper) market more aggressively in response to the banking stress. Results also indicate that larger firms have the ability to access the market in spite of having poor financial conditions. This leaves the subset of small firms with poor financials in a vulnerable situation,” said the study on ‘Non-bank funding sources and Indian corporates’ published under the aegis of the RBI’s Mint Street Memo.

“The results indicate that bolstering the funding sources for efficient but liquidity crunched small and medium-scale enterprises is also likely to be important in arresting the next wave of NPAs,” the study said.

The study went on to add that current policy has its focus on debt recoveries from larger borrowers. “The results indicate that corporate bond, ECB and CP market have allowed at least a subset of firms to diversify their funding sources. The ability to substitute the sources of financing is important to shield the economy from adverse real effects of a financial crisis,” it said.

Source: ET


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