Will RBI’s sops ease the liquidity crunch at NBFCs? | Mint
Active Stocks
Fri Feb 23 2024 09:56:57
  1. Tata Steel share price
  2. 146.80 0.65%
  1. State Bank Of India share price
  2. 767.85 0.25%
  1. HDFC Bank share price
  2. 1,426.80 0.49%
  1. Wipro share price
  2. 535.35 0.77%
  1. ITC share price
  2. 412.60 -0.41%
Business News/ Companies / News/  Will RBI’s sops ease the liquidity crunch at NBFCs?
BackBack

Will RBI’s sops ease the liquidity crunch at NBFCs?

Bankers say that lenders are quite comfortable in terms of liquidity and, thus, would not like to use these incentives

Banks hold excess government securities as statutory liquidity ratio. As lending has been slow, banks have been parking excess funds in government securities.Premium
Banks hold excess government securities as statutory liquidity ratio. As lending has been slow, banks have been parking excess funds in government securities.

The Reserve Bank of India (RBI) on 19 October incentivized banks to lend to non-banking financial companies (NBFCs) and housing finance companies (HFCs) in a bid to unclog the lending freeze some of them witnessed after the IL&FS crisis. Mint analyses the measures.

What has RBI done to ease NBFC liquidity?

The central bank has given some incentives to banks to allow flow of funds to NBFCs. It has allowed banks to use government securities as level 1 high-quality liquid asset equivalent to the bank’s incremental lending to NBFCs and HFCs after 19 October. This will ease the mandatory liquidity coverage ratio (LCR) requirements for banks and they will have more funds to lend. Besides, RBI has allowed banks to lend up to 15% of their capital funds to a single non-infrastructure funding NBFC from the earlier 10%. The measures are available up to 31 December this year.

How will these measures help?

RBI has said that banks can use government securities for computing LCR, equivalent to loans given to NBFCs and HFCs after 19 October, but up to 0.5% of their net demand and time liabilities or their total deposits. This measure is expected to facilitate bank lending of around 59,000 crore to NBFCs and HFCs, given that system deposits stood at 118 trillion as on 28 September. The second measure is expected to ease restrictions on lending to a single NBFC/HFC, which will give more headroom for lending to large entities without breaching regulatory limits.

Do banks hold excess govt securities for this end?

Banks hold excess government securities as statutory liquidity ratio. As lending has been slow, banks have been parking excess funds in government securities.

What’s the reaction of bankers and experts?

Bankers say that lenders are quite comfortable in terms of liquidity and, thus, would not like to use these incentives. They believe that lending to NBFCs is risky at the moment and, therefore, the RBI measures may not have any significant effect. On RBI easing exposure limits to some NBFCs, they say no bank has 10% of its exposure to one NBFC, and the five percentage point hike will not push them to lend. Experts say the steps are short term in nature, and RBI probably believes the liquidity crunch will ease by December.

Why is bank lending important for NBFCs?

Banks are an important source of funds for NBFCs, so a lending push could ease their liquidity crunch. A Credit Suisse report said that over the last few years, NBFCs/HFCs saw a strong supply of funds from banks (43% year-on-year growth as of August) and mutual funds (35% of debt assets under management), making this asset class among the largest exposures for these fund suppliers. Bank lending to NBFCs has grown to 6.2% of system loans and formed 20% of incremental bank loans in recent quarters, the report said.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

ABOUT THE AUTHOR
Shayan Ghosh
Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
Catch all the Corporate news and Updates on Live Mint. Check all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 22 Oct 2018, 11:34 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App