The crisis in the non-banking financial company NBFC sector, triggered by the series of defaults by the systemically important Infrastructure Leasing & Financial Services Ltd (IL&FS) last year, is far from over, according to RBI Governor Shaktikanta Das. Confirming that the top 50 NBFCs - shortlisted on the basis of balance sheet size, volume of operations, governance practices and credit behaviour - are being closely monitored to avoid yet another collapse, Das flagged off "signs of fragility" in some of them.
Das said that over the past several months, not a day has passed without an internal review or a discussion on the sector or individual NBFCs. "It is our endeavour that there is no contagion," Bloomberg quoted him as saying. Last month, the RBI had released its latest Financial Stability Report (FSR) which cautioned that a failure of any NBFC or housing finance company (HFC) would act as a "solvency shock to its lenders" since they are among the largest borrowers of funds from the financial system, especially banks.
It had added that the contagion from the malaise gripping shadow lenders, along with a looming global trade war and instability stemming from US actions, were among the biggest threats to the markets. "Solvency contagion losses to the banking system due to idiosyncratic HFC/NBFC failure show that the failure of [the] largest of these can cause losses comparable to those caused by the big banks, underscoring the need for greater surveillance over large HFCs/NBFCs," the June FSR stated. Given that there were 9,659 NBFCs registered with the regulator as on March 31, 2019, of which 88 were deposit-accepting and 263 were systemically-important non-deposit accepting NBFCs, the risk posed is significant.
While the liquidity crunch brought on by the IL&FS debacle has now eased, the problems of the NBFCs are entering a new phase. Some lenders such as Dewan Housing Finance Corp and tycoon Anil Ambani's Reliance Capital are struggling, putting the loans they received from regulated banks at risk. "We are constantly in touch with the large lenders to such NBFCs including HFCs where we see some signs of fragility," Das reportedly said, adding that financial sector stability is a key focus area.
Das also made it clear that lenders that haven't been diligent in their lending practices will have to "pay a price" for it. Without naming any company he said that there have been some instances of governance lapses. "Our effort is to segregate the way there have been lapses ... to see that there is no repeat instances of systemically important large NBFC collapsing," said Das. And in the process, "some promoters have to make certain sacrifices, promoters have to accept haircut, the banks will have to deal with it appropriately within the parameters".
The carrot part of this carrot-and-stick policy came earlier this month. On July 5, Finance Minister Nirmala Sitharaman proposed to improve NBFCs' access to funding by providing a limited backstop for the purchase of their assets in her Budget speech. The government will provide a partial guarantee to state-owned banks for the acquisition of up to Rs 100 crore of highly rated assets of NBFCs. The RBI, which is now a regulator of HFCs, also eased liquidity ratio rules for banks to encourage refinancing for shadow lenders.
However, Das resisted calls to provide a separate liquidity window for the struggling NBFCs, claiming that "refinance window is a misnomer". Stating that the RBI currently cannot and will not be lending directly to NBFCs, he made it clear that the matter is up to the banks, depending on the collateral. In any case, for the past month-and-half, the system has seen liquidity surplus by more than Rs 1 lakh crore, he added.
(Edited by Sushmita Choudhury Agarwal)
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