RBI needs to put more liquidity in market to fix NBFC mess: Rajan

Economic situation in India is much better on the inflation front, says former RBI guv

Amid non-banking finance companies (NBFCs) facing liquidity crisis, former RBI governor Raghuram Rajan on Tuesday said the central bank needs to examine the liquidity problem much closer and solve the issue by putting liquidity in the market.

"I think the markets are somewhat nervous but I don't think given that NBFCs account for 17 to 18 per cent of assets, that this is an unmanageable problem. I think we can manage it, we have to look carefully at it, see what is really a solvency issue, what is a liquidity issue,” he said.

"Certainly on the solvency front, it is up to these privately managed entities to raise equity at this point when they still have the capacity and shore up their balance sheets. There is a tendency sometimes to run to the government and say please bail me out. I think first they have to exhibit everything they can do on their own before the government even contemplates anything on that sort," Rajan added.

Rajan said that the economic situation in India is "much better" on the inflation front, for which both the government and the RBI deserve credit.

India is growing faster than most other countries but there is a need to create jobs and there is "probably need (to do) somewhat more than where we are today, he added.

"Where there is more worry is on the fiscal deficit front and here I am not talking just about the central government fiscal deficit which has been coming down but the aggregate fiscal deficit. Even as the central government is bringing it down, the states are taking it up. When you look at the total you find that over the last 3 or 4 years the aggregate fiscal deficit has actually gotten slightly worse and not better," he said.

Besides, the current account deficit (CAD) is blowing out partly because of the relatively weak exports and partly because of the price of oil has gone up. "It has come down recently but it is a risk that we cannot ignore at this point," Rajan said. In general, central banks, he said, avoid lending to direct entities. Lending to direct entities involves credit evaluation and central banks are not in fiscal function of bailing out entities.

“Certainly on the solvency front, it is up to these privately managed entities to raise equity at this point when they still have the capacity and shore up their balance sheets. There is a tendency sometimes to run to the government and say please bail me out”