The ongoing two-day RBI board meeting in Mumbai is expected to touch upon the liquidity squeeze gripping the non-banking finance companies. Concerned that this could cause the credit markets to collapse, putting the broader economy at risk, the government is reportedly pushing for additional contingency measures.
According to The Economic Times, the government thinks that the RBI opening a special liquidity window for NBFCs, apart from banks honouring credit lines already sanctioned to them, will help. Economic Affairs Secretary SC Garg and Financial Services Secretary Rajiv Kumar, as RBI board members, are participating in the ongoing meeting.
"We are watching it closely. Both the government and the RBI are regularly in touch," a person aware of the deliberations told the daily. "A special liquidity window is a mechanism tried in the past and also banks should honour their sanctioned credit lines to NBFCs."
The RBI opened special liquidity windows in the wake of the 2008 global financial crisis and again in 2013, following the taper tantrums - a term coined to describe market volatility following the US Fed's announcement that it would reduce its bond-buying programme.
The RBI has already taken steps to boost capital flow to NBFCs, the latest being the easing of lending norms. On Friday, the apex bank allowed the banks to use government securities equivalent to their incremental credit to NBFCs for a three-month period to meet their liquidity coverage ratio (LCR) requirements. Moreover, the single borrower exposure limit for NBFCs that do not finance infrastructure stands increased from 10% to 15% of capital funds, up to December 31, 2018.
This is "over and above the amount of credit to NBFCs and HFCs outstanding on their [banks'] books as on October 19, 2018," the RBI had said. Liquidity coverage ratio refers to highly liquid assets that financial institutions need to hold in order to meet short-term obligations.
The provision will allow banks to free up Rs 50,000-60,000 crore of liquidity which banks can lend to NBFCs till year-end. However, the move was downplayed by industry players, and analysts described it as too little and too late. According to them, the only beneficiaries will be those into short-term consumer loans as well as micro-finance loans.
The NBFCs have come under heavy pressure in recent times with their stock prices witnessing sharp fall on the bourses, triggered by the debt default crisis at the "systemically important" Infrastructure Leasing & Financial Services Ltd (IL&FS). This crippled the prospects of smooth credit flow of the sector. Then, last week, the loan default by property developer Supertech led to further selloffs in NBFCs with any potential exposure to real estate.
It is against this backdrop that the government is mulling the need for a special liquidity window. The view among policymakers is that more needs to be done now to ensure that the problem is properly contained since it could otherwise have wide spillover effects. But not all experts concur with the government's thinking.
"Special liquidity window cannot be the first line of defence. It can only be the last resort measure. I do not think that is the case now. Damage has been contained to a large extent. Special window can dent the confidence in markets," Abheek Barua, chief economist, HDFC Bank, told the daily.
However, the problem has worsened as the system has been liquidity deficit since mid-September and experts peg the deficit at Rs 1.39 lakh crore. Though the RBI conducted OMO (open market operation) purchases to the tune of Rs 24,000 crore during the second and third week of October, it had little impact since it is also buying dollars to keep rupee depreciation in check.
According to CARE Ratings, while the overall liquidity situation in the banking system is "likely to improve to an extent" during the current week due to the eased liquidity norms, liquidity is to "face continued pressures on account of fortnightly reporting of SCBs with RBI, higher festive season demand, forex sales to curtail depreciation in the rupee, month end demand by importers and government borrowings".
So the expert opinion is that further measures such as cutting the cash reserve ratio - the money banks keep with the RBI as a proportion of deposits - may be required.
With PTI inputs