‘Govt and RBI Likely to Find Mid­dle Ground on NBFC Liq­uid­ity Is­sue’

DBS BANK EX­PECTS more reg­u­la­tory changes for non-bank­ing fi­nan­cial com­pa­nies to limit pipe­line sys­temic risks

The Economic Times - - Markets: Beating Volatility - Our Bureau

Kolkata: The gov­ern­ment and the Re­serve Bank of In­dia are likely to ar­rive at a mid­dle ground over eas­ing of liq­uid­ity for non­bank­ing fi­nance com­pa­nies, while the gov­ern­ment-owned banks wouldn’t be able to be a per­fect sub­sti­tute for fund­ing medium and small en­ter­prises, DBS Bank said in a note. The gov­ern­ment’s con­cerns over liq­uid­ity has been one of the rea­sons be­hind its dif­fer­ences with the mon­e­tary au­thor­ity. RBI did not agree to the gov­ern­ment’s call for a ded­i­cated liq­uid­ity win­dow to tide over the cri­sis and has in­stead opted for in­di­rect liq­uid­ity sup­port to NBFCs through banks and money mar­kets.

The suc­cess­ful rollover of NBFCs’ com­mer­cial pa­pers is a re­flec­tion of eas­ing liq­uid­ity, said a per­son close to the RBI. The gov­ern­ment, on the other hand, upped the ante on the RBI to part with the re­serve that it kept as con­tin­gent buffer. “The gov­ern­ment and the RBI are likely to reach a com­mon ground on sup­port mech­a­nism for NBFCs, which has been a con­tentious point of late,” DBS Bank econ­o­mist Rad­hika Rao said. She ex­pects more reg­u­la­tory changes for NBFCs, par­tic­u­larly on the fund­ing make-up for non-bank en­ti­ties to limit pipe­line sys­temic risks.

At present, the liq­uid­ity squeeze faced by In­dia’s NBFCs has eased some­what in re­cent days with sup­port from banks, Rao said. Data sug­gested that NBFCs have re­turned to banks and ru­pee-debt mar­kets to raise funds, al­beit at a higher cost, low­er­ing the re­liance on short-term bor­row­ings.

But their li­a­bil­i­ties are likely to get re-priced more of­ten than as­sets (par­tic­u­larly shorter-tenor bor­row­ings), pos­ing re­fi­nanc­ing chal­lenges. One of the lit­mus tests will be the up­com­ing com­mer­cial pa­per ma­tu­ri­ties, in the re­gion of .₹ 1-1.5 lakh crore in Q418.

“For now, wider sys­temic risk has been con­tained with as­sur­ances of liq­uid­ity sup­port from the RBI, se­cu­ri­ties reg­u­la­tor and the fi­nance min­istry,” Moody’s In­vestors Ser­vice said. “But the econ­omy is now at risk of a credit squeeze from non-bank fi­nan­cial en­ti­ties, fol­low­ing the In­fra­struc­ture Leas­ing & Fi­nan­cial Ser­vices Ltd de­fault cri­sis.” NBFCs made up 12-15% of the to­tal credit gen­er­ated in FY17 while 11 out of 19 gov­ern­ment-owned banks have been ring-fenced un­der the RBI’s Prompt Cor­rec­tive Ac­tion frame­work for de­te­ri­o­ra­tion of their as­set qual­ity and ero­sion of cap­i­tal, with re­stric­tions on fresh loans and div­i­dend dis­tri­bu­tion.

“It will be a chal­lenge for banks to meet all the dis­placed fund­ing de­mand,” Rao said. The PCA rules has crip­pled credit avail­abil­ity with non-PCA banks go­ing for higher due dili­gence while banks do not have the reach to ru­ral pock­ets where NBFCs en­joy com­pet­i­tive ad­van­tage.

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