RBI To Tighten Asset-Liability Norms For NBFCs
The Reserve Bank of India is looking to strengthen norms to address the mismatch in assets and liabilities of non-bank lenders after defaults by Infrastructure Leasing and Financial Services Ltd. triggered liquidity concerns.
Some of these companies had resorted to seeking too much short-term capital to finance long-term projects, RBI Deputy Governors Viral Acharya and N Vishwanathan said at a press conference held after the monetary policy announcement where it surprised the markets by leaving rates unchanged. The new norms, according to Vishwanathan, will help in avoiding any debt rollover risks in the sector.
IL&FS, a core investment company that finances infrastructure projects, ran into a severe liquidity crunch and defaulted on commercial paper repayments along with its subsidiaries. The stress led to a spike in borrowing costs for non-banking financial services companies and triggered fears of a contagion. That forced the government to take control of the systemically important IL&FS and a board led by veteran banker Uday Kotak will draw up a resolution plan for the company and its 348 associated companies.
Vishwanathan explained that such core investment companies were a category of NBFCs created to fund groups. The norms governing these companies state that about 90 percent of their investments should be in group-level entities and at least 60 percent of that must be in the form of equity.
In the last few years, Vishwanathan said NBFCs have seen tremendous growth and to finance that they tapped the market to avail short-term debt. “To manage marginal cost, some of them resorted to increasing market borrowing in the form of CPs (commercial papers), he said. “We are looking at strengthening ALM (asset-liability) guidelines to avoid rollover risk going forward. We also believe that isolated events should not be seen as having any system-wide implications.”
Acharya said chasing lower marginal cost of funding to acquire more market share in lending is a myopic strategy. And it’s associated with significant rollover risks in the medium term and the practice seems to have led to a maturity rat race in the financing of the financial sector, he said.
Increasing asset liability mismatches in this manner can be a particularly imprudent policy in a time of global and domestic tightening conditions. It is best to avoid this to safeguard the financial firm’s own balance sheets and the overall financial stability.Viral Acharya, Deputy Governor, RBI
Both the deputy governors said the RBI along with the Securities and Exchanges Board of India and the government is closely watching the developments. They, however, reiterated that the NBFC sector was strong and the supervisory and regulatory framework governing it was robust.