RBI rejects liquidity window for NBFCs; govt demurs citing cash crunch

The Reserve Bank of India (RBI) has ruled out a special refinancing window for non-banking financial companies (NBFCs) as the regulator feels that there is no systemic risk as of now.

“There is not a strong enough case for a special financing window right now. The regulator does not want to make an across-the-board intervention. Only about 200 of the over 11,000 NBFCs in the country are deposit-taking, so there is no systemic issue,” a person aware of the development said.

The RBI board meeting held on Tuesday discussed the liquidity scenario of NBFCs along with the government’s request to ease the prompt corrective action (PCA) framework in a bid to free up capital for public sector banks (PSBs) and help them expand their businesses.

The meeting highlighted a difference of opinion between the government and the RBI on the issue. While the finance ministry’s representatives on the board — Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar — felt that NBFCs, particularly the smaller ones and housing finance companies (HFCs), were facing some liquidity crunch, the central bank was of the view that the problem was not widespread, sources said.

The RBI, they said, would call another board meeting soon after Diwali, which is on November 7, as it did not have all the required information related to NBFCs. “To prescribe a solution, we need to isolate (the area) where the problem is, and it’s mostly restricted to wholesale lending,” a source said. On Friday, the RBI had announced regulatory relaxations and incentives, giving banks room to lend more to NBFCs and HFCs in a bid to increase liquidity.

The measures were in the wake of the lending freeze witnessed following the IL&FS crisis, which also caused jitters in the stock markets. Earlier this month, the government had announced increasing the refinancing limit of the National Housing Bank to Rs 300 billion from Rs 240 billion, for eligible HFCs, for the current financial year.

The board meeting also took note of the government’s request, following bankers’ demand, to ease PCA norms for banks and remove more banks from the framework in the light of their improved performance in the first quarter. “No decision was taken on relaxing PCA norms. Banks are yet to declare the second-quarter results and based on that, their performance will be reviewed in the next board meeting in November. A call on easing PCA norms will be taken then,” the source added.

However, a government official said it expected some changes in the PCA framework in the next few weeks. “Economic policy needs to be flexible. We expect some banks to come out of PCA this financial year. The resolution process through insolvency courts and further recapitalisation by the government will help these banks,” a top government official said, requesting anonymity. The government expects banks to recover around Rs 1 trillion through resolution of 12 big cases of non-performing assets referred to the NCLT by the RBI.

The government has pitched to the RBI for alignment of PCA provisions, in terms of various risk weight, provisioning and capital norms, with the globally accepted Basel norms, sources said. Basel-III, an international regulatory framework for banks, is being implemented in India in phases since April 2013, and will be fully implemented by March 2019.

Points of friction between RBI & govt

Regulatory powers

RBI wants more teeth to supervise PSBs

Govt says the banking regulator has enough powers  

RBI’s Feb 12 circular  

RBI remains firm on new rules    

Govt wants a relook at strict enforcement of norms for stressed power firms

PCA framework

RBI says that without improvement in profile, there will be no tweaking in capital norms

Govt seeks review of certain norms for PCA to give banks more room to lend 

Payments regulator

RBI wants to keep powers with itself as the financial system's regulator

Govt proposes a separate regulator for payments systems

(With inputs from Arup Roychoudhury)