RBI creates room for banks to lend more to NBFCs

By: | Published: November 3, 2018 4:55 AM

In a move aimed at easing a liquidity crunch faced by non-bank lenders, the Reserve Bank of India (RBI) on Friday allowed banks to offer partial credit enhancement (PCE) to bonds issued by non-banking financial companies (NBFCs) and housing finance companies (HFCs), subject to certain conditions.

In a move aimed at easing a liquidity crunch faced by non-bank lenders, the Reserve Bank of India (RBI) on Friday allowed banks to offer partial credit enhancement (PCE) to bonds issued by non-banking financial companies (NBFCs) and housing finance companies (HFCs), subject to certain conditions.

In a move aimed at easing a liquidity crunch faced by non-bank lenders, the Reserve Bank of India (RBI) on Friday allowed banks to offer partial credit enhancement (PCE) to bonds issued by non-banking financial companies (NBFCs) and housing finance companies (HFCs), subject to certain conditions.
The PCE enables an NBFC/HFC to improve its creditworthiness by securing a backing from a higher-rated entity (a bank, in this case). Though the RBI move is aimed at helping these firms to raise more resources from the market at lower rates, some banks remained skeptical of the scheme as it could increase their capital needs further.
Introduced in 2015, the PCE facility was restricted to bonds issued only for project financing.

The move to expand it to NBFCs and HFCs that are systematically important will help refinancing needs, especially of smaller retail-focussed NBFCs with ratings below AA, said analysts.
In a notification, the central bank said the tenor of the bonds issued by NBFCs and HFCs for which PCEs are provided won’t be less than three years. “The proceeds from the bonds backed by PCE from banks shall only be utilised for refinancing the existing debt of the NBFCs and HFCs,” it added.
In the Financial Development and Stability Council meeting on Tuesday, the finance ministry had asked the RBI to ensure that the liquidity crisis following the IL&FS crisis doesn’t spill over to the broader financial system. The RBI, which didn’t see a crunch across the NBFC space, had assured of adequate steps to prop up liquidity, if required.

The department of economic affairs has reportedly estimated a funding gap of Rs 1 lakh crore by end-December if the pace of fundraising witnessed in the first half of October (Rs 20,000 crore, or 68% lower than the corresponding period a year earlier) is maintained.
The RBI’s notification also said, “The exposure of a bank by way of PCEs to bonds issued by each such NBFCs and HFCs shall be restricted to 1% of capital funds of the bank within the extant single/group borrower exposure limits and the exposure of banks to NBFCs and HFCs by way of PCEs shall be within the aggregate PCE exposure limit of 20%.”

According to a recent Credit Suisse report, lax norms adopted by the regulator NHB (an arm of the RBI) on how HFCs must report their asset-liability management (ALM) could be cloaking the ALM mismatch in the segment. So although HFCs have come out with decent ALM records, with shortfall (asset minus liabilities) reported at under 10% of their loan books over the near term, the report cautioned that the easier guidelines could be “distorting the true picture”.
Cautioning against a looming credit crunch, the report has said even as bank credit growth in the last two years has averaged at 7%, a strong 20%-plus growth in NBFC credit aided the overall credit expansion beyond 10%. The imminent slowdown in NBFC growth could lead to a domestic credit crunch, and overall credit growth could drop below 10%, as state-run banks continue to be constrained by capital and private banks by liquidity.

Already, the mutual fund exposure to NBFC debt at 30% of their debt asset under management is outsized and unlikely to sustain. As much as 55% of this is of short tenor. Large maturities over the next two months will be a challenge, given many NBFCs have mutual funds contributing 25-40% of their borrowings, says the report.

PCE is a mechanism through which a bond issuer attempts to improve its debt or credit worthiness by providing an additional comfort to the lender. It provides the bond purchaser reassurance that the borrower will honour its repayment through additional collateral, insurance, or a third party guarantee.

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