India: RBI allows banks to lend more to aid NBFCs

  • The Reserve Bank of India relaxed liquidity norms to ease the strain in the financial markets and allowed more bank lending to non-banking finance companies (NBFCs), which are facing asset-liability mismatches.
  • It’s estimated the move could free up as much as INR500bn for lending to the sector as it grapples with refinancing maturing commercial paper and short-term loans.
  • The central bank said banks are permitted to raise their exposure to a single NBFC that doesn’t finance infrastructure to 15% of capital from 10% until end-2018, thus making more funds available for big companies such as Housing Development Finance Corporation and Bajaj Finance, analysts said.
  • RBI’s measures on 19 Oct 18 follow a liquidity scare in the shadow banking system after IL&FS defaulted on payments, throwing the markets into turmoil.
  • The measures failed to keep India stocks from tumbling in the wake of weakness across Asian markets, which took their cue from the US. NBFC stocks dropped 3-17%.
  • A sudden outflow from mutual funds has worsened sentiment in India with NBFCs worrying about their ability to refinance debt.
  • Bank credit growth has averaged 7% in the past two years, whereas overall credit expansion was more than 10%, aided by over 20% growth in NBFC credit. Banks have a lending exposure of INR5.9tr to NBFCs.
  • RBI also said that banks can count higher lending to NBFCs equivalent to excess government bonds they own for meeting the liquidity coverage ratio (LCR) — liquid assets needed to meet short-term liabilities.
  • The latest step is among a series of liquidity infusion measures by the RBI as short-term interest rates spiked despite the monetary policy committee keeping interest rates unchanged at its recent meeting. While shifting its stance to “calibrated tightening” from “neutral,” it maintained the repo rate at 6.5%.
  • While promising sufficient liquidity in the financial markets, the central bank was critical at the time of the asset-liability mismatch at NBFCs and suggested that they raise more equity and long-term funds rather than focusing on profitability with short-term funds that create instability.

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