The Reserve Bank of India is likely to begin consultations on the draft guidelines after the results of the 2019 Lok Sabha polls are out, A BS report said quoting sources. The central bank is already reaching out to banks and NBFCs to find the best possible solution to the fund crunch.
To get a better grip on the situation, the RBI is thoroughly looking at the bad asset data made available by NBFCs. Although an industry-wide asset quality review may still be some time away, the central bank has begun reviewing asset-quality mismatches of systemically important NBFCs on a monthly basis. Earlier the exercise used to be carried out on a quarterly basis.
The default by Infrastructure Leasing and Financial Services (IL&FS) in September last year triggered a series of upheavals across the NBFC sector. The crisis started when one of its arms — IL&FS Financial Services — failed to meet commercial paper redemption obligations.
IL&FS was only the proverbial tip of the iceberg — it soon came to light that many NBFCs, especially smaller ones, had for quite some time been struggling to deal with corporate governance issues and debilitating asset-liability mismatches.
A crisis long in making
The collapse of IL&FS changed the dynamics of India’s borrowing market in a big way. Before the crisis broke, MFs used to provide for almost half of NBFCs’ funding requirements, the other half being accounted for by banks. After the liquidity crisis took root in the aftermath of IL&FS, both these funding avenues significantly diminished in scale.
NBFCs had given long-term loans to a large number of infrastructure, construction and real estate players. To fund their loan book, these NBFCs had taken short-term loans from banks and mutual funds. The projects that NBFCs had loaned to got delayed for a host of factors, which resulted in lakhs of crores of rupees getting locked up in various sectors.
Some borrowers turned out to be genuine, some not so much so. Wilful defaulters accounted for a large chunk of the NBFC loan book. The flow of cash soon stopped, leaving NBFCs unable to service their loans.
It triggered a ripple effect. Many of the promoters had pledged shares of their companies to borrow money from NBFCs. After the cash flow dried up, they were unable to finish their projects nor were they able to sell them off. More importantly, they no longer had access to any more funds.
This left the non-banking lenders — also called shadow banks — reeling under high borrowing costs that have led to deep funding troubles for them. That these entities have mostly been shut out of the bond market after IL&FS has also compounded matters.
New lease of life
A special borrowing window — on the lines of the one Indian banks already have — could be among the likely measures RBI is contemplating for NBFCs, the BS story quoted a source as saying.
RBI will decide the loan eligibility of an NBFC — how much it can borrow — after factoring out its exposures to real estate and construction finance. The size of agriculture, retail and other such assets will determine an NBFC’s eligibility to borrow.
The loan advanced will be at a discount to an NBFC’s assets because of the fact that these entities don’t hold G-secs, the BS report said.
Under the plan, liquidity is unlikely to be offered directly but through banks. A special concessional liquidity window could be opened for the purpose, said a source.
The development comes a few days after RBI directed NBFCs above a certain size to create a new position: risk officers. Companies with an asset size of Rs 5,000 crore or more have been told to follow up on this, a move that could significantly change the NBFC risk management scene in India.
And the impact of the likely new credit line may already be showing. “There are rumours in the market that RBI will open a special credit line for NBFCs,” Asutosh K Mishra, head of research for institutional equity at Ashika Stock Broking Ltd, told Bloomberg. “That expectation is driving up prices of some of the companies.”