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To encourage banks to lend to non-banking finance companies (NBFCs), the Reserve Bank of India has upped the single NBFC exposure limit for banks.
Further, it allowed loans given by banks to NBFCs for on-lending to agriculture, micro and small enterprises (MSEs), and housing to be classified as priority sector lending (PSL).
Liquidity crisis
The above-mentioned measures come in the wake of NBFCs, including housing finance companies (HFCs), facing liquidity pressures in the aftermath of the IL&FS imbroglio.
To harmonise the counterparty exposure limit to single NBFC with that of the general limit, the RBI has decided to raise a bank’s exposure limit to a single NBFC to 20 per cent of Tier-I capital of the bank from 15 per cent now.
This move will give banks the headroom to increase their exposure to NBFCs. Hitherto, under the revised guidelines on the large exposure framework (LEF) that came into effect from April 1, 2019, a bank’s exposure to a single NBFC was restricted to 15 per cent of its Tier I capital.
For entities in other sectors, the exposure limit is 20 per cent of Tier I capital of the bank, which can be extended to 25 per cent by bank’s board under exceptional circumstances.
The central bank has allowed (subject to certain conditions) bank lending to registered NBFCs (other than microfinance institutions) for on-lending to agriculture (investment credit) up to ₹10 lakh; MSEs up to ₹20 lakh; and housing up to ₹20 lakh per borrower (up from ₹10 lakh at present) to be classified as PSL.
Economic growth
The RBI has taken the above-mentioned measure in order to further increase the credit flow to certain priority sectors, which contribute significantly to economic growth in terms of export and employment. Referring to his earlier observations about 50 large NBFCs and some HFCs being monitored by the RBI, Governor Shaktikanta Das said: “It is our endeavour to ensure that there is no collapse of any large or systemically-important NBFC.
“We are monitoring the situation, and we will see how to move forward. It is being done very intensively.”
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