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NBFCs need refinance window to avoid liquidity risk

There is a need to allow refinancing window to non-banking finance companies (NBFC) in order to parry liquidity crunch, which is the single-largest risk for the sector, according to experts.

NBFCs need refinance window to avoid liquidity risk
While the Reserve Bank of India (RBI) has introduced scale-based regulation for NBFCs, the sector needs a lender of last resort as the risk is coming from the liquidity side. (IE)

There is a need to allow refinancing window to non-banking finance companies (NBFC) in order to parry liquidity crunch, which is the single-largest risk for the sector, according to experts.

“There is a need to allow NBFCs to take deposits and permit them a refinancing window with the Reserve Bank of India (RBI),” Vishal Kampani, non-executive vice chairman of JM Financial said at an event organised by the Confederation of Indian Industries (CII).

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Industry players like Rakesh Singh, managing director and chief executive officer of Aditya Birla Capital, echoed similar views. “Compliance, governance and transparency give confidence to banks, from whom we borrow. The biggest risk for this sector is the liquidity and funding risk. The risk has not come from the credit risk. Banks have lenders of last resort, housing finance companies can go to National Housing Board. I think we need something similar for NBFCs,” Singh said.

While the Reserve Bank of India (RBI) has introduced scale-based regulation for NBFCs, the sector needs a lender of last resort as the risk is coming from the liquidity side. With the scale-based regulation, NBFCs are required to maintain higher capital buffers and create enterprise risk management mechanisms to manage risks related to credit, liquidity, operations and financial crime, and setting up of governance framework on the role of senior management, a CII report said.

In addition, to support the credit demand of Rs 30 trillion in the next couple of years, non-banks will be required to raise a significant amount of capital, Kampani said, adding that the exposure of the mutual fund sector to NBFCs has reduced to Rs 25,000 crore from Rs 2.5 trillion.

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Other than bank borrowing, securitisation and corporate bond issuances are the sources of funds for NBFCs. The securitisation volume jumped 48% in the first six months of FY23, led by participation from public and private sector banks, and crossed the Rs 75,000-crore mark, according to a Crisil report. The bank lending to NBFCs increased 31% year-on-year in September, and as per RBI data, the total outstanding of the NBFC sector to banks is Rs 12 trillion as of September 30.

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