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.