RBI readies credit line rules for NBFCs, may seek views after poll results

The Reserve Bank of India (RBI) is working on a liquidity line for non-banking financial companies (NBFCs) and may ask for suggestions from participants on draft guidelines after election results are declared. 

One of the likely measures is the central bank opening a special borrowing window for NBFCs, similar to what banks have, according to sources. How much an NBFC can borrow would be decided after excluding the NBFC’s real estate and construction finance exposure. 

NBFCs will be able to borrow, based on their retail, agriculture, and other such assets. Since NBFCs don’t hold government securities, the central bank’s loan would be at a discount to NBFCs’ assets. 

The RBI is unlikely to offer liquidity directly, but through banks, for which a special concessional liquidity window can be opened, said a banker who took part in one of the discussions. 

According to sources familiar with the matter, the central bank is regularly in touch with bankers and NBFC executives as to what best could be done for the sector. An industrywide asset quality review is not under consideration right now, said sources.

However, the central bank is engaged in monthly stocktaking on asset-liability mismatches (ALM) of large NBFCs to gauge their liquidity position. The NBFCs are mandated to submit quarterly ALM reports, but now it is on a monthly basis. However, the RBI is having a fresh look into the bad debt numbers presented by the NBFCs. 

The RBI numbers showed that the gross bad debt of the NBFC sector was 6.1 per cent of the total loans, whereas for banks, the gross bad debt ratio was over 10 per cent.

“Banks and NBFCs operated in the same environment, tapping the same set of clients. For NBFCs, the quality of clients was often lower, so the non-performing asset (NPA) numbers may not present an accurate picture. There is suspicion that even the networth of some of the NBFCs may have turned negative recently,” said a person keenly following the space.

To be sure, the draft guidelines on NBFCs are one of the few critical RBI activities stuck because of the elections and the model code of conduct-related rules. The RBI will also come out with revised guidelines on NPA recognition and resolution, and the critical Bimal Jalan Committee report on reserve transfer is also stuck because of elections. 

NBFCs need urgent financing support as their fundraising ability has been curtailed after the Infrastructure Leasing & Financial Services (IL&FS) crisis last September. 

About half of the funding in the sector used to come from the mutual fund (MF) industry, while bank loans filled up the rest. 

Both have narrowed after the IL&FS group firms defaulted on payments last year, triggering a liquidity crisis in the market.

The non-banks used to raise short-term money, but lent long term, creating an inherent liquidity mismatch. This is largely because of ready takers of those papers in the MF segment. 

Before the IL&FS crisis in September, MFs had deployed Rs 1.3 trillion of their debt funds to less than 90-day commercial paper market. From 17.6 per cent of the funds deployed to this segment in August 2018, it slipped to 12 per cent (Rs 94,000 crore) by February 2019.

The banks, though, are somewhat supporting the segment by giving working capital loans to compensate for the lack of MF support. 

Bank loans to NBFCs stood at Rs 5.58 trillion by the end of January, from Rs 3.76 trillion a year ago, the RBI data shows.

TAKING STOCK

• The RBI is unlikely to offer liquidity directly, but through banks, for which a special concessional liquidity window can be opened
• The central bank is engaged in monthly stocktaking on asset-liability mismatches of large NBFCs to gauge their liquidity position
• The RBI numbers showed that the gross bad debt of the NBFC sector was 6.1% of the total loans