RBI keeping close watch on troubled NBFCs, HFCs

The Reserve Bank of India (RBI) is monitoring major non-bank lenders and housing finance companies and the central bank will take necessary steps to maintain financial stability, governor Shaktikanta Das said on Thursday.

Das said that the Reserve Bank will ensure that there is adequate liquidity available in the system to meet the productive requirements of the economy. The Monetary Policy Committee (MPC) said in its statement that liquidity in the system turned into an average daily surplus of ₹66,000 crore in early June after remaining in deficit during April and most of May due to restrained government spending.

“The Reserve Bank of India injected liquidity of ₹70,000 crore in April and ₹33,400 crore in May on a daily net average basis under the liquidity adjustment facility (LAF). It conducted two open market operations (OMOs) purchase auctions in May amounting to ₹25,000 crore and a dollar buy/sell swap auction of $5 billion ( ₹34,874 crore) for a tenor of three years in April to inject durable liquidity into the system,” it said.

According to RBI, the weighted average call money rate (WACR)—the operating target of monetary policy— remained broadly aligned with the policy repo rate and traded above the policy repo rate (on an average) by 6 basis points (bps) in April, but below the policy repo rate by 6bps in May. Moreover, RBI has announced that it would conduct an OMO purchase auction of ₹15,000 crore on 13 June.

The governor’s comments come at a time when most non-banks are starved of liquidity, with some even resorting to selling assets to be able to meet repayment deadlines. Following a spate of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) in the previous year, most non-banks have found it difficult to raise money from banks and the markets alike. For instance, Dewan Housing Finance Corp. Ltd’s credit rating was downgraded to default by Crisil and Icra on Wednesday after the liquidity-starved home financier missed an interest payment deadline on a set of non-convertible debentures (NCDs).

Asked about the recent default by the housing finance company, Das said that while the RBI does not regulate the housing finance companies (HFCs), nonetheless, banks have significant exposures to HFCs and RBI is mandated to look after the financial stability of the entire economy.

“In that backdrop, RBI has been very closely monitoring the activity and performance and the developments in the NBFC sector, including the HFCs,” he said, adding that individual entities themselves are resorting to various measures using market mechanisms to mobilize additional liquidity and resources to meet their liabilities and commitments.

According to Das, RBI is committed to ensure that the country has a robust, well-functioning NBFC sector. “The RBI will not hesitate to take whatever steps are required to ensure that financial stability is not adversely impacted in any manner,” said Das.

On RBI’s supervision of non-banks, Das said that the central bank’s mechanisms are very robust. “I would believe that our supervision mechanisms are very robust and from time to time, many aspects of our supervision report are shared with the entities. Our concerns are shared with the entities with a specific direction to place it before their board of directors,” he said, adding that the central bank expects the boards of these non-banks to take necessary actions based on its supervision reports.

That apart, RBI said it will set up a working group to review the regulatory guidelines and supervisory framework applicable to core investment companies (CICs). “In light of recent developments, there is a need to strengthen the corporate governance framework of CICs,” said RBI.

Core investment companies are NBFCs that hold not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies. Experts have been seeking review of CIC guidelines ever since defaults by IL&FS, a large systemically important core investment company. “Further, in light of recent developments, there is a need to strengthen the corporate governance framework of CICs,” said RBI.

Earlier last month, RBI mandated non-banking financial companies (NBFCs) with assets of more than ₹5,000 crore to appoint a chief risk officer (CRO). The central bank said that with the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk management practices. The primary role of the risk officer will be identification, measurement and mitigation of risks and all credit products (retail or wholesale) shall be vetted by the CRO from the angle of inherent and control risks. The CRO’s role, RBI said, in deciding credit proposals shall be limited to being an adviser.

RBI said the CRO shall report directly to the managing director and chief executive officer or the risk management committee (RMC) of the board. Moreover, in case the CRO reports to the MD and CEO, the risk management committee or the board shall meet the CRO in the absence of the MD and CEO, at least on a quarterly basis.