RBI opens banking tap to ease liquidity crunch at NBFCs

RBI allows banks to use government securities as level 1 high quality liquid asset equivalent to the bank's incremental lending to NBFCs and housing finance companies after 19 October

Shayan Ghosh
Updated19 Oct 2018
The central bank has also allowed banks to lend up to 15% of their capital funds to a single NBFC, allowing them more headroom from 10% earlier. Photo: Reuters
The central bank has also allowed banks to lend up to 15% of their capital funds to a single NBFC, allowing them more headroom from 10% earlier. Photo: Reuters

Mumbai: The Reserve Bank of India (RBI) on Friday incentivized bank lending to non-banking financial companies (NBFCs) by easing liquidity norms and increasing the ceiling for lending to a single NBFC until 31 December.

The central bank allowed banks to use government securities as level 1 high quality liquid asset (HQLA) equivalent to the bank’s incremental lending to NBFCs and housing finance companies (HFCs) after 19 October 2018. This will be limited to 0.5% of the bank’s net demand and time liabilities (NDTL) or its total deposits. The central bank’s measure is expected to facilitate additional lending of 59,000 crore to NBFCs.

This steps take the total carve-out from statutory liquidity ratio (SLR) for computing liquidity coverage ratio (LCR) to 13.5%.

At a time when lending is slow, banks have been parking excess funds in government securities. Currently banks hold more than 29% of their NDTL in government securities as SLR while the RBI mandated them to hold at least 19.5%.

“It has been decided that, with immediate effect, banks will be permitted to also reckon government securities held by them up to an amount equal to their incremental outstanding credit to NBFCs and Housing Finance Companies (HFCs), over and above the amount of credit to NBFCs and HFCs outstanding on their books as on 19 October 2018, as Level 1 HQLA under facility to avail liquidity for liquidity coverage ratio (FALLCR) within the mandatory statutory liquidity ratio (SLR) requirement,” said RBI.

The central bank has also allowed banks to lend up to 15% of their capital funds to a single NBFC, allowing them more headroom from 10% earlier.

“The single borrower exposure limit for NBFCs which do not finance infrastructure stands increased from 10% to 15% of capital funds, up to 31 December 2018,” the central bank said.

However, bankers believe this would not be of much help as banks are quite comfortable in terms of liquidity and, therefore, would not want to use these incentives.

“Liquidity is not a concern for us and we are comfortable with our LCR. The lending to NBFCs is more about risk perception than regulatory incentives,” said a senior banker at a public sector bank.

No bank has exposure of 10% of their capital to a single NBFC and, therefore, the increase of five percentage points will not push them to lend, the banker said.

The measures are short-term in nature and it will be up to the bank to decide if it wants more exposure to the NCFC sector, said Karthik Srinivasan, group head, financial sector ratings, ICRA.

“The central bank probably feels that the liquidity crunch will ease by December and, therefore, wants to let banks lend to NBFCs to mitigate short-term problems,” said Srinivasan.

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