NBFC liquidity crisis: Recent efforts to infuse NBFCs with bank funds are skirting core concerns

Following up on the Budget and announcements of the Monetary Policy Committee that seek to push bank lending to NBFCs, the Centre recently issued guidelines on the subject. It has said that the government credit guarantee on NBFC assets or loans will be limited to 10 per cent of the asset’s value, valid for two years from the purchase of the asset by the bank. While the Budget has set aside ₹1 lakh crore to refinance high quality assets of “financially sound” NBFCs, it is unlikely that the funds transfer on this count will be substantial. This is because assets are likely to take some time to turn substandard. Besides, NBFCs must be AA-rated, with no asset-liability mismatch (ALM) in any of the lending categories — a tall order, given that even high-rated NBFCs, such as those backed by public sector banks, have ALM in some buckets. The move does not address the existing skew of just a handful of NBFCs getting all the bank funds (30 out of 9,659 of them registered with the RBI account for 80 per cent of the total exposure, according to the Financial Stability Report of June 2019). This trend has worsened after the IL&FS — and now, DHFL — defaults, with banks turning more risk averse. With mutual funds, insurance and commercial papers too withdrawing from the scene, NBFCs have returned to the bank window (no longer more expensive as in the pre-IL&FS debacle period), which, however, is open to just a few.

Raising a bank’s exposure limit to a single NBFC too perpetuates the status quo, while accommodating NBFC lending under priority sector targets may infuse some liquidity. However, the crisis calls for a concerted response, with ₹1 lakh crore of NBFC dues coming up for redemption soon. This has impacted markets, despite the 35 basis points cut in the repo rate this month. NBFCs, strapped for funds, have in turn frozen lending to real estate and other sectors, leading to a tightening of interest rates while PE funds gain ground. The consumption and working capital crisis is explained by the domino effect of banks and other investors closing the NBFC tap.

Expanding the scope of the one-time partial guarantee may be worth considering in this scenario. This will provide NBFCs out of the ambit of bank finance with access to cheap funds vis-a-vis commercial rates. While wrongly arguing that NBFCs will not be allowed to fail, the RBI has at the same time been wary of extending bank finance to a larger number of NBFCs, even as they could do with one chance. Key sectors are weighed down by lack of access to cheap finance. This will perpetuate loan defaults, driving confidence down and rates up, even as the RBI strives for ‘transmission’ of rate cuts. So far, it has skirted the problem.

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