Wednesday, June 16

Rely on equity to fund assets for long term: RBI to NBFCs

Non-Banking Finance Companies (NBFCs) received lessons on asset-liability management from the central bank Friday after a series of IL&FS defaults led to a near seizure of short-term money markets last month, signalling likely tighter regulations for the industry that takes credit to the unbanked in India.

At the post-policy interaction with the media, the central bank leadership prodded NBFCs to raise more equity and long-term debt instead of relying on short-term funds. “I would like to encourage, in fact urge, financial firms to place greater reliance on equity and other modes of long-term finance for funding of long-term assets rather than relying excessively on short-term paper… chasing lower marginal cost of funding in order to retain or acquire market share in lending is a myopic strategy,” said Viral Acharya, deputy governor, Reserve Bank of India (RBI).

“It is associated with significant rollover risks in the medium term and this practise appears to have led to a maturity rat race.” Acharya said that increasing asset liability mismatch in this manner can be particularly imprudent policy during tightening global and domestic liquidity conditions.

RBI Governor Urjit Patel (2nd from left) with deputy governors at a post-policy press conference in Mumbai.

“It is best to avoid this, in order to safeguard financial firms’ own balance sheets as well as overall financial stability,” said Acharya. He said that the RBI, the government, and the capital markets regulator were monitoring the liquidity situation for NBFCs, of which there were about 11,000 in the country.

A spike in yields on Dewan Housing Finance’s NCDs resulted in tight liquidity and higher borrowing costs. Commercial paper issuances have come down as lower rated issuers moved from short term debt instruments to alternate fund-raising options.

NBFCs use diverse sources of funds for expansion: They also tap the market and to keep the marginal cost lower, they borrow in the form of commercial papers. Asset liability mismatch may be a concern with firms borrowing short term funds and lending to longterm infrastructure companies.

“That could result in asset liability mismatch, more so for companies that are financing long-term assets like infrastructure,” said NS Vishwanathan, deputy governor. “There is an ALM guideline and we are looking at strengthening them so that we can avoid this rollover risk.”

Vishwanathan said that the NBFC sector plays an important role in meeting the credit needs of different segments of the economy, particularly the informal sector. “The NBFC sector, overall, is very strong,” said Vishwanathan. “The regulatory and supervisory framework is robust.”

Leave a Reply

Your email address will not be published. Required fields are marked *