RBI takes note of NBFC crisis, allows banks to provide enhanced liquidity

By: | Updated: November 2, 2018 8:56 PM

The NBFCs are facing liquidity crisis after one of the biggest non-banking financing firm IL&FS defaulted on multiple loans, leading to the appointment of the new government-picked board under top banker Uday Kotak.

The decision has come following a showdown between the government and the RBI over the credit restrictions on weak banks.The decision has come following a showdown between the government and the RBI over the credit restrictions on weak banks. (Image: Reuters)

The Reserve Bank of India (RBI) on Friday announced that it is allowing banks to provide partial credit enhancement (PCE) to bonds issued by the systemically important non-deposit taking non-banking financial companies (NBFCs) amid the liquidity crisis in the sector. The decision has come following a showdown between the government and the RBI over the credit restrictions on weak banks.

“It has now been decided to allow banks to provide partial credit enhancement (PCE) to bonds issued by the systemically important non-deposit taking non-banking financial companies (NBFC-ND-SIs) registered with the Reserve Bank of India and Housing Finance Companies (HFCs) registered with National Housing Bank,” the central bank said in a statement.

Global rating agency Moody’s recently warned about liquidity situation in NBFCs. The NBFCs are facing liquidity crisis after one of the biggest non-banking financing firm IL&FS defaulted on multiple loans, leading to the appointment of the new government-picked board under top banker Uday Kotak.

“The proceeds from the bonds backed by PCE from banks shall only be utilized for refinancing the existing debt of the NBFC-ND-SIs/HFCs,” the RBI said.

The central bank added that exposure of a bank by way of PCEs to bonds issued by each NBFC-ND-SI/HFC will be restricted to 1% of capital funds of the bank within the extant single/group borrower exposure limits.

PCE is a mechanism through which a bond issuer attempts to improve its debt or creditworthiness 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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