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The RBI, on Wednesday, said it has increased the concentration limits for banks’ exposure to individual non-banking finance companies (NBFCs), including housing finance companies (HFCs), from 10 per cent to 15 per cent.
The central bank also said it is facilitating ‘re-intermediation’ by banks that have lost market share to NBFCs. This comes in the backdrop of NBFCs facing a liquidity crunch following the IL&FS imbroglio, with mutual funds shying away from roll over funds raised by NBFCs via debt instruments.
“The RBI has been watching the market developments on this front quiet closely since August-end. We have been in regular touch with SEBI to assess the fallout in terms of mutual fund redemptions and the resulting roll over risk for NBFCs and HFCs.
“The RBI continues to provide system-wide liquidity at an augmented quantum and pace. In addition, and specifically for NBFCs and HFCs, we have increased the liquidity that banks can raise against their G-Sec holdings as collateral, specifically also for onlending to NBFCs and HFCs,” said Deputy Governor Viral Acharya after the announcement of the fifth bi-monthly monetary policy.
He elaborated that the RBI has relaxed the concentration limits of banks for lending to individual NBFCs and HFCs, with this limit being increased from 10 per cent to 15 per cent.
“Importantly, the RBI has also taken measures to facilitate asset and risk transfers within the financial system. This can be considered as re-intermediation across financial players. We believe this is healthy for financial stability, overall,” emphasised the Deputy Governor.
For example, when the banking sector was facing capital constraints in the wake of corporate NPA recognition, NBFCs and HFCs picked up their market share.
“So, to this end, to facilitate ‘re-intermediation’ of this type, the RBI has taken two measures. First, it has allowed banks to provide partial credit enhancement on bonds issued by NBFCs/HFCs (this will help raise the credit quality of these bonds, thereby attracting mutual funds to provide greater roll-over funding to NBFCs and HFCs), and second, we have also relaxed the rules for securitisation by NBFCs and HFCs (this should allow risks to be transferred to better funded bank balance sheets),” explained Acharya.
The Deputy Governor stressed that the abovementioned measures have been carefully chosen from the full set of options based on the RBI’s analysis of the reasons behind the funding stress for NBFCs and HFCs.
Acharya underscored that the RBI is guided, by and large, by the principle of addressing system-wide liquidity. The RBI also stands ready to be the lender of last resort, but that is provided conditions warrant that sort of an extreme measure. In RBI’s assessment, there is no such necessity at the present.
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