RBI not in favour of providing special credit window to NBFC sector

The Reserve Bank of India is not in favour of providing special credit window to the NBFC sector to tide over the liquidity crunch as the cash crunch phenomenon is not systemic, said sources.

Industry players and government think-tank NITI Aayog made a case for giving special credit window for non-banking financial companies (NBFCs) facing liquidity crunch following default by group of companies of IL&FS since September 2018.

Many NBFCs, including DHFL and Indiabulls Finance, came under severe liquidity pressure compelling them to bring down their reliance on commercial papers.

Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot. There are concerns that NBFCs may run out of money, which will lead to defaults.

According to the sources, the Reserve Bank of India (RBI) is of the view that special window is not required as of now based on their assessment.

The central bank feels that cash crunch is not a sector-specific phenomenon but limited to few large NBFCs which have over-leveraged due to aggressive lending.

According to estimates, about Rs 1 lakh crore of commercial papers (CPs) raised by NBFCs from investors will come up for redemption in the next three months.

CPs are debt instruments issued by companies to raise funds for a time period of up to one year.
 

As the NBFCs are cash-strapped, there is a looming fear that they will default on the CPs.

The sources also said the RBI board during the two-day meeting ended on Tuesday took stock of the NBFC sector and cash crunch faced by them.

The central bank is keeping a tab on the liquidity position of these firms on a monthly basis and recently asked NBFCs with assets over Rs 5,000 crore to appoint a chief risk officer (CRO).

The primary role of the risk officer will be identification, measurement and mitigation of risks and all credit products (retail or wholesale) shall be vetted by the CRO from the angle of inherent and control risks. The CRO's role in deciding credit proposals shall be limited to being an adviser.