NBFC Crisis: What The RBI Can Do To Help India’s Non-Bank Lenders
Logo of the Reserve Bank of India on the gate of the central bank’s head office in Mumbai. Photographer: Dhiraj Singh/Bloomberg

NBFC Crisis: What The RBI Can Do To Help India’s Non-Bank Lenders

After a brief reprieve, India’s non-bank lenders are once again facing a crisis of confidence.

Repayments of nearly Rs 1.3 lakh crore in debt to mutual funds are due in the April-June quarter, leading to tight liquidity conditions for a number of non-banking financial companies and mortgage lenders. The refinancing requirements come against the backdrop of reduced inflows into debt mutual funds and a reluctance from banks to increase their exposure to NBFCs.

Analysts and experts suggest that the Reserve Bank of India conduct an asset quality review to reduce the unease around NBFCs and housing finance companies. In addition, talk of a special borrowing window for NBFCs has also resurfaced. On Monday, Business Standard reported that such a window was under discussion, leading to a surge in stock prices of NBFCs and HFCs. BloombergQuint could not confirm whether such a window is likely to be introduced.

In December, RBI Deputy Governor Viral Acharya said the RBI stands ready to be the lender of last resort for NBFCs but did not feel the need to do so at that stage. Should the central bank now need to step in, its options may be limited. Unlike banks, NBFCs cannot borrow directly from the RBI’s Liquidity Adjustment Facility window and do not have large amounts of government securities to offer as collateral.

So what are the options?

SLR Holdings By Large NBFCs And HFCs

According to at least two senior officials at housing finance companies, the regulator could consider extending funds against the statutory liquidity ratio holdings maintained by large NBFCs.

Deposit-taking NBFCs as well as housing finance companies are required to maintain an SLR of 15 percent of the outstanding public deposits held by them. These are government securities that these companies are required to hold to protect depositors in any solvency crisis.

The RBI could allow these non-bank lenders to temporarily borrow from its LAF facility using these government securities as collateral. However, the public deposits held by most NBFCs are limited and so are the government securities.

Raman Aggarwal, chairman of the Finance Industry Development Council, an industry body of non-bank lenders, said that such a window might not be enough to provide the liquidity necessary to support the industry. According to Aggarwal, there are only about 100 deposit-taking NBFCs and a majority of them have a small deposit base.

Should the RBI chose to open such a window, HFCs may be able to generate more liquidity using the facility than pure NBFCs.

Special Window Through A Special Purpose Vehicle

In 2009, still reeling under the fallout of the global financial crisis, the RBI had put in place a special purpose vehicle to help NBFCs struggling for liquidity. NBFCs facing a mismatch in assets and liabilities could approach the SPV, backed by the RBI, to access short-term financing.

The RBI had appointed the IDBI Stressed Asset Stabilisation Fund Trust, controlled by IDBI Bank Ltd, as the SPV. The regulator had said that these companies could pledge three month commercial papers and non-convertible debentures with this SPV to access financing. The SPV, in turn, received financing from the RBI.

This SPV was subject to restrictions on the tenure and rating of securities that it could accept in lieu of financing.

A person who was directly involved with this process in 2009 said that only two NBFCs ended up using the window to raise small amounts. However, the move was a confidence booster as it signaled the RBI’s support to the sector. He spoke on condition of anonymity.

A similar structure could be considered for funding NBFCs at this juncture to tide over liquidity issues until non-bank lenders are able to correct asset liability mismatches, the head of a large commercial vehicle financier said, speaking on conditions of anonymity. The RBI should also consider taking secured loans from the retail and small and medium enterprises as collateral in return for liquidity, this person said.

Banks, The Final Saviours

Apart from directly intervening in the liquidity scenario, the regulator could also use its power to nudge banks into more lending to NBFCs.

The RBI could even consider carving out a portion of the SLR holdings by banks to specifically fund NBFCs, Aggarwal of FIDC said. The regulator has already permitted banks some relaxation in rules to ensure bank lending to NBFCs does not fall. Banks could also be used as a vehicle to finance NBFCs. In addition to securitisation, NBFCs could pledge loans for the short term to raise funds, said the three people quoted above.

The trouble with a bank-led rescue of the NBFCs is that banks are averse to adding to their own risk at a time when they are still grappling with bad loans from the past lending cycle.

Ashvin Parekh, managing partner at Ashvin Parekh Advisory Service, said that the regulator should deal with the structural concerns across the NBFC sector before considering a special window.

“I would expect the RBI to come out with clear guidelines or standards around the extent of leveraging and on the extent of public funds that NBFCs can raise before opening a liquidity window,” Parekh said.

The conditions in 2019 are very different from those in 2008-09, he said while adding that the RBI should not step in only to ensure that non-bank lenders can maintain their lending margins and shareholder returns.

At that time the RBI provided the liquidity window with the help of the banking system, but in 2019 the story has changed as the banking system does not have the kind of balance sheet strength needed. Public funds cannot be utilised by NBFCs to improve their (lending) spreads and have only a few shareholders benefit out of it. It is the regulator’s duty to ensure that the deployment of public funds is done in a just and fair manner.
Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Service
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