Police sit at the entrance of the Reserve Bank of India (RBI) building in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

RBI Makes Another Attempt To Kick-Start Fund Flow To NBFCs

The Reserve Bank of India has announced more steps to try and restart the flow of credit to non-banking financial companies.

The measures come against the backdrop of continued concerns that NBFCs are facing a credit crunch, with market borrowings drying up and banks reluctant to lend to the sector.

In a notification on Friday morning, the RBI said that:

  • Government securities equal to the incremental credit disbursed by banks to NBFCs after Oct. 19 will be eligible to be used to meet LCR requirements.
  • Above provision applicable till Dec. 31, 2018.
  • This is in addition to the 13 percent carve out from SLR permitted for use against LCR requirements.

The move is intended to act as an incentive for banks to continue lending to NBFCs. Bank credit to NBFCs had grown rapidly over the last two years, allowing for the non-bank lenders to grow rapidly. However, recent incidents such as the defaults of IL&FS group entities has left banks nervous about lending to NBFCs. This, at a time, when market funding to NBFCs has also dried out due to outflows from debt mutual funds.

Also read: Hold Tight: Here’s Why The NBFC Scare Isn’t Over Yet

Exposure Limits Eased

In addition, the RBI eased the single borrower exposure limits for NBFCs not in the infrastructure segment.

“The single borrower exposure limit for NBFCs which do not finance infrastructure stands increased from 10 percent to 15 percent of capital funds, up to December 31, 2018,” said the RBI. The decision gains significance as banks would have been constrained to lend even to healthy NBFCs, if they had hit that limit.

The RBI has taken a number of measures to ease liquidity conditions at a system level. On Oct. 1, the RBI said it would buy government bonds worth Rs 36,000 crore over the course of the month. These measures have eased liquidity in the banking system. However, the flow of this liquidity to NBFCs remains constrained. Unlike banks, NBFCs can not borrow directly from the RBI’s repo window since they do not hold government securities. As such, the only option to the ease flow of funds to NBFCs right now is to incentivise banks to lend to them.

On Oct. 9, the country’s largest lender State Bank of India said that it would increase purchases of NBFC loan portfolios from Rs 15,000 crore to Rs 45,000 crore this year.