RBI announces new measures to ease challenges faced by NBFCs

Experts welcomed the move stating it would help ease the liquidity constraints

RBI to infuse Rs 12,500 crore via OMOs on March 14 [File] The RBI has decided to purchase government securities under open market operations | PTI

The Reserve Bank of India on Wednesday, apart from cutting its benchmark repo rate by 35 basis points, announced additional measures aimed at easing the liquidity constraints being faced by non-banking finance companies.

The default by infrastructure finance company IL&FS last year sent shockwaves in the system. Following the IL&FS crisis and troubles at a few other NBFCs, banks as well as mutual funds reduced their exposure to the sector leading to liquidity constraints. The troubles in the NBFC sector have had an impact on the automobile as well as real estate industry, where a lot of lending happens through NBFCs.

The RBI has said its been monitoring the situation and taking steps from time to time to ease the problems faced by NBFCs. Its latest measures include harmonisation of single counterparty exposure limit for banks’ exposure to single NBFCs with general single counterparty exposure limit.

Under the revised guidelines on large exposure framework that came into effect from April 1, 2019, a bank’s exposure to a single NBFC is restricted to 15 per cent of its Tier-I capital, while for entities in the other sectors the limit is 20 per cent, which can be extended to 25 per cent by the bank’s board under exceptional circumstances.

“As a step towards harmonisation of the counterparty exposure limit to single NBFC with that of the general limit, it has been decided to raise a bank’s exposure limit to a single NBFC to 20 per cent of Tier-I capital of the bank,” said RBI.

The central bank has also decided to allow, subject to certain conditions, bank lending to registered NBFCs, other than micro-finance institutions, for on-lending to agriculture (investment credit) up to Rs 10 lakh, micro and small enterprises up to Rs 20 lakh and housing up to Rs 20 lakh per borrower to be classified as priority sector lending.

Detailed guidelines for the same are to be issued by the end of August.

Experts welcomed the move stating it would help ease the liquidity constraints.

“The steps taken to revive bank lending to the NBFC sector through higher bank exposure limits to a single entity and expanding the priority sector credit definition will help to alleviate the funding challenges in the sector and facilitate higher credit flow to the retail segment,” said Suman Chowdhury, president – ratings at Acuite Ratings and Research.

Pushkar Mukewar, co-founder of Drip Capital said that the increasing flows to NBFCs will boost credit availability, which in turn is good news for micro, small and medium enterprises and exporters of all verticals.

“Loan disbursals from NBFCs were continuously falling in past few months and slowdown in the sector has been impacting the overall economy. The rate cut and the liquidity infusion by RBI will give further impetus to NBFC lending business,” said Katen Patel, CEO of CASHe.