Revision as of 15:17, 9 February 2019

Credit to NBFCs

2017, 18+ the 2019 policy

RBI eases bank loan norms for NBFCs with top rating, February 8, 2019: The Times of India

Credit to NBFCs, 2017, 18
From: RBI eases bank loan norms for NBFCs with top rating, February 8, 2019: The Times of India

In Maiden Policy, RBI Guv Das Gives Cash Boost To Agri, Non-Banking Fin Biz

Links Exposure To Ratings Issued By Accredited Agencies

Better rated nonbanking finance companies (NBFCs) have improved chances of getting loans with the RBI relaxing capital requirements for banks that lend to them. “With a view to facilitating flow of credit to well-rated NBFCs, it has now been decided that rated exposure of banks to all NBFCs, excluding core investment companies, would be risk-weighted as per the ratings assigned by the accredited agencies, in a manner similar to corporates,” the RBI said in its statement. Loans to a core-investment company, which acts as a holding company for other businesses, would continue to attract a 100% risk weightage.

Current guidelines require that bank exposure to systemically important NBFCs (other than asset and infrastructure financiers) have to be uniformly risk-weighted at 100%. What this means is that 100% of the loan is deemed to be exposed to risk and banks have to provide capital for the whole loan. As against this, the risk weightage is around 50% for most home loans.

“The amount of borrowing from banking system, which, as per the new announcement would get rating benefit is Rs 2.52 lakh crore. The change of risk weights, as per rating distribution would lead to capital saving equivalent to 7.58% of the assets under consideration, thereby releasing an amount of Rs 19000 Cr of capital,” said Soumya Kanti Ghosh, chief economist, SBI.

According to RBI deputy governor N S Vishwanathan, “This was an aberration in the risk-weight system. So,

this was a harmonisation and aimed at reducing complexity in regulations.” Besides this, the RBI also announced harmonisation of NBFC categories. Henceforth, all NBFCs engaged in credit intermediation — asset finance companies (AFCs), loan companies, and investment companies — have been grouped into a single category to provide them flexibility in operations.

The relaxation by the central bank comes at a time when NBFCs are facing tight liquidity conditions. After IL&FS — an infrastructure financier promoted by top rated companies — defaulted on its loans, lenders have turned wary. Even as there was some confidence building up in the markets, DHFL’s stocks and bonds came under pressure following rumours and allegations by a news site.

Data released by the RBI shows that bank credit to NBFCs stood at Rs 5,70,900 crore — nearly 7% of overall bank credit of Rs 82.4 lakh crore as on December 21, 2018. This is an increase of 55% over Rs 3.6 lakh core in the previous year.

Making it easier for better-rated NBFCs to borrow could encourage consolidation as less creditworthy companies might sell their loans to those with better finances.

Loan and advances

2014-17

Non-Banking Finance Co's loans and advances, 2014-17
From: October 10, 2018: The Times of India

See graphic:

Non-Banking Finance Co's loans and advances, 2014-17

Financial crises

2018: Liquidity squeeze hurts NBFCs

Prashanth Perumal J., October 25, 2018: The Hindu

With concern over repayment of dues, shadow banks are caught in a vicious cycle

What’s up with NBFCs?

Shares of non-banking financial companies (NBFCs) have witnessed a steep fall in recent weeks after concerns over whether they can successfully meet their short-term dues. Housing finance companies (HFCs) in particular have seen their shares punished severely over fears of a severe liquidity crisis. Dewan Housing Finance has been the worst hit among HFCs. The current crisis began with the default of Infrastructure Leasing and Financial Services on several of its dues last month. The Union government subsequently decided to step in and assure lenders to the company that their money would be paid back safely without any default.

How did they get into trouble?

Many NBFCs use short-term loans borrowed from the money market to extend long-term loans to their customers. This leads to a mismatch in the duration of their assets and liabilities and exposes NBFCs to the substantial risk of being unable to pay back their lenders on time. NBFCs usually resort to rolling over, or refinancing, their old short-term debt with new short-term debt to compensate for the mismatch in duration. But even though NBFCs usually manage to roll over their short-term debt smoothly, there are times when they may fail to do so. Such risk is high particularly during times of crisis when lenders are affected by fear. In such cases, they may have to resort to sale of their assets at distress prices to meet their dues. This can turn a liquidity crisis into a more serious solvency crisis, wherein the total value of the assets of a company falls below the value of its total liabilities. Further, NBFCs also face the risk of having to pay higher interest rates each time they refinance their short-term debt. As interest rates rise across the globe, equity investors believe that the cost of borrowing of NBFCs will rise and affect their profit margins. This is seen as the primary reason behind the fall in the shares of many NBFCs. Investors may be pricing in the prospect of falling profits for NBFCs in the coming quarters.

What lies ahead?

It is estimated that NBFCs need to repay about Rs. 1.2 trillion of short-term debt in the current quarter. How they manage to meet these dues remains to be seen. It is hoped that banks will offer a helping hand to NBFCs to meet their short-term dues to lenders like mutual funds. Many further believe that a widespread financial panic may not be on the cards as the government will act as a lender of last resort. Such bailouts, however, create the risk of moral hazard in the wider financial system. NBFCs, for instance, may continue to borrow short-term to extend long-term loans to their customers because they expect the government to bail them out if they get into trouble. In fact, some believe that financial institutions in general have traditionally resorted to borrowing short-term to finance long-term loans simply because there is an implicit guarantee extended by the government. As the cost of borrowing funds rises, NBFCs may have to settle for lower profits unless they find a way to pass the burden of higher rates on to borrowers.

See also

Banking, India: I

Non-banking finance companies: India