Modi government plans early capital infusion as NBFCs liquidity stress rattles financial markets

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Updated: October 26, 2018 12:56:57 PM

The move to ensure that liquidity conditions remain orderly in the markets comes amid worries on NBFCs' approximately Rs 1 lakh crore worth of debt papers, which are coming up for redemption by March 2019.

The announcement regarding the proposed plan is expected to be announced shortly. (Image: Reuters)

As the ongoing liquidity crisis of non-banking financial companies (NBFCs) rattles the financial markets, the Indian government has decided to intervene and is currently in the process to prepare a slew of measures to ease the situation. The Department of Financial Services (DFS) and top officials in the Ministry of Finance are working closely to prepare the plan, which may include possible advancement of cash infusion in scheduled public sector banks and involvement of SIDBI to infuse liquidity, the Indian Express reported citing sources.

The proposed measures are likely to be presented at the level of the Prime Minister’s Office and an announcement regarding this is expected to be come shortly.

The move to ensure that liquidity conditions remain orderly in the markets comes amid worries on NBFCs’ approximately Rs 1 lakh crore worth of debt papers, which are coming up for redemption by March 2019. On the other hand, raising debt through commercial paper and corporate debt market has also become difficult.

According to the sources, the finance ministry was relying on the Reserve Bank of India (RBI) to ease some of the Prompt Corrective Action (PCA) norms, which put some lending and operational restrictions on banks to boost their financial health. However, the government had to look for alternative measures after the RBI showed reluctance on the matter. Out of the 21 public sector banks, 11 banks are under the PCA framework as of now.

While referring to the central bank’s stance of being inflexible with regard to the PCA framework, a senior finance ministry official told the paper, “Economic policy has to be flexible, it cannot be like municipality bylaws.”

PMO is now likely to ask the central bank to ease the PCA norms, allowing 11 banks to start lending to NBFCs. At present, banks have stopped lending to NBFCs and maintaining high SLR (statutory liquidity ratio). The government is looking at the option of infusing Rs 45,000 crore in state-run banks, in order to boost their financial health and thereafter pull them out from the PCA framework, a source told the paper. Also, the government is expected to ask SIDBI to “provide backstop guarantee to a pool of funds raised by NBFCs”.

As on October 12, 2018, bank credit has shown an uptick as it went up 14.3% to Rs 92,60,572 crore as against Rs 81,01,532 crore in the same period last year, while credit growth was reported at 12.51% in the previous fortnight, according to the latest RBI data.

The recent defaults by Infrastructure Leasing & Financial Services (IL&FS) group on its short-term debt obligations have hit sentiments of the financial markets badly by creating distrust in the wholesale debt market. After the IL&FS debt crisis, both public sector and private sector banks stopped lending to NBFCs.

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