The Centre recently issued guidelines on push bank lending to NBFCs.
This followed up the Budget and announcements of the Monetary Policy Committee.
What did the guidelines say?
It has said that the government credit guarantee on NBFC assets or loans will be limited to 10% of the asset’s value, valid for 2 years from the purchase of the asset by the bank.
The Budget has set aside Rs.1 lakh crore to refinance high-quality assets of “financially sound” NBFCs.
It is unlikely that the fund transfer on this count will be substantial because assets are likely to take some time to turn substandard.
What is a tall order?
The guidelines require the NBFCs to be AA-rated, with no asset-liability mismatch (ALM) in any of the lending categories.
This is a tall order given that even high-rated NBFCs, such as those backed by public sector banks, have ALM in some buckets.
The move does not address the existing skew of just a handful of NBFCs getting all the bank funds.
According to the Financial Stability Report of June 2019, 30 out of 9,659 of them registered with the RBI account for 80% of the total exposure.
This trend has worsened after the IL&FS — and now, DHFL — defaults, with banks turning more risk averse.
With mutual funds, insurance and commercial papers too withdrawing from the scene, NBFCs have returned to the bank window which, however, is open to just a few.
What helps to solve the crisis?
Raising the exposure limit to a single NBFC too perpetuates the status quo, while accommodating NBFC lending under priority sector targets may infuse some liquidity.
However, the crisis calls for a determined response, with Rs.1 lakh crore of NBFC dues coming up for redemption soon.
This has impacted markets, despite the repo rate cut this month.
NBFCs, strapped for funds, have in turn frozen lending to real estate and other sectors, leading to a tightening of interest rates while PE funds gain ground.
The consumption and working capital crisis are explained by the domino effect of banks and other investors closing the NBFC tap.
What is the way forward?
Expanding the scope of the one-time partial guarantee may be worth considering in this scenario.
This will provide NBFCs out of the ambit of bank finance with access to cheap funds vis-a-vis commercial rates.
RBI has been wary of extending bank finance to a larger number of NBFCs. Key sectors are weighed down by lack of access to cheap finance.
This will continue loan defaults indefinitely, driving confidence down and rates up, even as the RBI strives for ‘transmission’ of rate cuts.
