NBFCs to receive more liquidity support as RBI raises exposure limit

The Reserve Bank of India (RBI) has allowed banks’ lending to non-banking financial companies (NBFCs) for on-lending to agriculture, micro and small enterprises, and housing to be classified as priority sector lending, up to specified limits. 

The RBI raised any bank’s exposure limit to a single NBFC from the existing 15 per cent to 20 per cent of tier-1 capital. The idea is to ease liquidity pressure in NBFCs. 

Banks’ lending to NBFCs for on-lending to agriculture up to Rs 10 lakh a borrower will be treated as priority sector lending. 

So, too, for loans up to Rs 20 lakh for micro and small enterprises and housing.

This has been done to increase the credit flow to certain sectors which contribute significantly to economic growth in terms of export and employment, and recognising the role played by NBFCs in providing credit to these, said RBI.

Sunil Mehta, chairman, Indian Banks’ Association, said this could raise credit flow to these sectors.

Karthik Srinivasan, senior vice-president at ratings agency ICRA, said: “Under the current norm, banks had to buy out the portfolios of NBFCs and if those underlying assets qualifies under priority sector lending, the banks would get the benefit of this classification. Now, it seems even direct lending by banks to an NBFC engaging in on-lending to these sectors will be so classified. On how are they going to do it, we will have to wait for the guidelines.”  

In the Union Budget, the government aimed to encourage public sector banks to buy high-rated pooled assets of up to Rs 1 trillion of financially sound NBFCs. For which, it said, it would give a one-time and six-month partial credit guarantee for the first loss of up to 10 per cent. 

And, the RBI had changed banks’ bond-holding norms, saying government securities of up to one per cent of the deposit base would be considered high-quality assets under Basel-III norms. This will allow banks to borrow an additional Rs 1.34 trillion exclusively for buying such pooled assets and giving loans to NBFCs. 

Raman Aggarwal, chairman, Finance Industry Development Council, says: “The increase in limit for banks on their exposure to single NBFCs will have impact only on the large NBFCs because banks would have by now hit the ceiling. The broader message is that the RBI is nudging banks to lend more.”   

Adding: “In 1999, RBI had issued a circular that all bank lending to NBFCs for onward lending to all priority sectors will be classified as priority sector lending for banks. It was working perfectly because it helped banks to meet their priority sector lending targets and NBFCs were also getting funds. In 2011, RBI withdrew this. Today’s step by RBI will prove to be helpful to all NBFCs, including the large number of small and medium ones,  as they will now be able to get more funding from banks.”

On NBFCs’ access to liquidity, RBI governor Shaktikanta Das said: “There are NBFCs with strong balance sheets which are able to access the market. Some NBFCs are stressed because of various factors and credit flow has not happened for them. But, then again, it is for banks to make their risk assessment and take the call.”

After the IL&FS default last year, many large NBFCs have also been struggling to get funds to even repay existing liabilities. To preserve liquidity, they have cut on disbursement. RBI has assured the sector that it will do what is required to support it. 

“We have identified some 50 large NBFCs, which include HFCs (housing finance corporations) which we are monitoring. It is our endeavour to ensure there is no collapse of any systemically important or any large NBFC. In that direction, we are monitoring them and the evolving situation, and will see how it moves forward,” the governor said.