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Fund-starved NBFCs seek dedicated liquidity window

The issue of a dedicated liquidity window cropped up soon after the IL&FS crisis surfaced last year.

By: ENS Economic Bureau | Mumbai |
July 3, 2019 4:44:38 am
Reserve Bank of India, RBI, non-banking finance companies, commercial banks, NBFC, banking news, indian express The issue of a dedicated liquidity window cropped up soon after the IL&FS crisis surfaced last year.

Hit by liquidity crunch and high cost of borrowings, non-banking finance companies on Tuesday sought short-term and long-term measures from the government and the Reserve Bank of India (RBI), including a dedicated liquidity window for NBFCs through banking channels, a permanent refinance window for NBFCs on the lines of National Housing Bank and access for small and medium sized NBFCs to avail refinancing from MUDRA.

“The crying need of the hour is to create a dedicated liquidity window for NBFCs through the banking channels. The same may be provided for a period of one year. Precedence may be drawn from a special repo window created by the RBI in 2008 for banks under the liquidity adjustment facility (LAF) for on-lending to NBFCs,” said Raman Aggarwal, chairman, FIDC, a representative body of NBFCs. Banks are showing reluctance to renew existing credit lines, FIDC officials said in a press conference here ahead of the Budget.

The issue of a dedicated liquidity window cropped up soon after the IL&FS crisis surfaced last year. However, the RBI, when Urjit Patel was the Governor, was not very keen to open any such window, fearing that the window will be misused by shady and weak NBFCs. Since 1999, the RBI had allowed all banks lending to NBFCs for on-lending to the priority sector to be treated as priority sector lending by banks. This gave a huge incentive to banks to lend to NBFCs. While it ensured sufficient bank funding to NBFCs at a reasonable cost, it also facilitated banks to meet their PSL targets. “However, this was abruptly withdrawn in 2011. The same arrangement may be restored urgently,” Aggarwal said.

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FIDC officials also proposed a dedicated ‘refinance window for NBFCs’ on the lines of National Housing Bank which provides refinance to housing finance companies. The Parliamentary Standing Committee on Finance in their 45th report dated June 2003 (relating to the Financial Companies Regulation Bill, 2000) had recommended setting up of a new refinance institution for NBFCs.

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George Alexander Muthoot, managing director, Muthoot Group, said banks have been reluctant to extend funds to NBFCs and they have also increased their lending rate. “The RBI has reduced the repo rate but banks are still lending at about 9.5 per cent to 10 per cent,” he said. “Banks have withdrawn unutilised credit lines to NBFCs and shown reluctance and hesitation to renew existing credit lines. The cost of borrowing from banks has gone up — even AAA rated NBFCs are faced with increase in rates by up to 100 bps. Portfolio buyout is a ‘band aid’ solution which does not result in growth,” FIDC said.

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As several NBFCs and HFCs are starved for funds and unable to disburse loans in the market, the industry players have been calling for government and regulatory support on infusion of liquidity. A liquidity window for them will not only help the sector come out of its woes to an extent, it will also infuse confidence among lenders and borrowers thereby pushing consumption demand in the economy.

For small & medium sized NBFCs, eligibility norms for availing refinance from MUDRA should be made favourable by allowing all RBI registered NBFCs to avail refinance. “Systemically important NBFCs should be allowed to act as aggregators by availing refinance from MUDRA for on lending to small and medium sized NBFCs,” FIDC said. According to the NBFCs, asset-liability mismatch is predominantly an issue only for long term lenders such as HFCs and infra financing NBFCs and not for general NBFCs, since 25-30 per cent assets mature within a year. “Some NBFCs resorted to short term commercial paper borrowing to take benefit of the interest rate arbitrage keeping unutilised banks credit line as a cushion. This has been significantly corrected by March 2019,” it said. “Nine months have passed since IL&FS defaulted, without any NBFC defaulting. NBFCs have fully met their liabilities, though restricted their lending,” said an NBFC official. Total disbursement by NBFCs during Q4 of FY19 dropped by 31 per cent.

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