Sector Watch: ‘Govt working on measures to ease NBFC cash crunch’

When asked about the government advancing the capital infusion schedule for the public sector banks, he said “After the second quarter results (of public sector banks), we will immediately look at that (infusion of capital).” Many state-owned banks are expected to report their results next week. Kumar said the government and the RBI are not discussing any relaxation in the Prompt Corrective Action (PCA) norms. However, the Centre’s contention is that the regulatory norms should be aligned with best international practices. This would provide banks with more liquidity at their disposal.

“Let’s be very clear about this…There is no (PCA) easing which is ever required, and should ever be done. There is no case for easing of any norm. What is being talked about, and that’s a consultative process, is aligning with whatever is the best international practice…Take it from the best, align it to it, and don’t keep it higher than that,” Kumar said.

The government is trying to persuade the RBI to align its capital to risk-weighted assets (CRAR) norms with Basel framework, which could free up around Rs 40,000 crore of capital for the state-owned banks. The RBI mandates banks maintaining minimum CRAR of 9 per cent, against the Basel capital adequacy norm of 8 per cent. Sources said relaxation of this norm could enable banks to increase the loan book by around Rs 2 lakh crore, injecting significant liquidity in the market.

Top finance ministry officials met select banks and NBFCs this week to work out ways resolve the challenges in the NBFC sector. “Our assessment is that there are sectoral concerns on liquidity, specially relating to NBFCs. But market-wide liquidity is in surplus and there is adequate liquidity for the banks,” a senior government official said. With nearly Rs 1 lakh crore worth of debt papers of NBFCs coming up for redemption by March and debt raising becoming more difficult, the government is planning these steps to infuse liquidity to ensure that that this issue is contained.

Earlier this month, Reserve Bank of India Deputy Governor Viral Acharya had argued against any dilution of the PCA norms. PCA framework imposes certain operational and lending restrictions on weak banks in order to improve their health. A total of 11 out of the 21 public sector banks are currently under the PCA framework.

To ease liquidity shortage, RBI recently eased banks exposure norms for NBFCs and pumped in liquidity through its open market operations (OMOs), while the State Bank of India proposed to buy their good quality NBFC assets worth Rs 45,000 crore. These measures have not provided enough support to NBFCs.