Mumbai: The liquidity crisis, which has become a bone of contention between the Reserve Bank of India (RBI) and the government, has its roots in banks’ reluctance to lend to non-banking financial companies (NBFCs), according to bankers Mint spoke with. According to the chief financial officer of a leading public sector bank, lenders are wary of lending to certain NBFCs because of a heightened risk-perception about the sector. He said that ever since some of the NBFCs defaulted on short-term papers, banks had become more cautious in lending to them.
Bank aversion to NBFCs fuelled India’s liquidity crisis
“We are monitoring how these NBFCs cope with the commercial paper redemption pressures and that will be a crucial criterion for additional lending,” said the CFO.
Commercial banks have three kinds of exposures to an NBFC: subscribing to their commercial papers, sanctioning a loan or a line of credit, and buying existing loans from them. According to RBI data, outstanding bank credit to all industry stood at ₹27.01 trillion in the fortnight ended 28 September, up 2.6% from the year-ago period. Loans to NBFCs stood at ₹5.46 trillion on the same fortnight, up 41.5% from the same period last year. This is the latest disaggregated sectoral data available from RBI.
Data compiled by Bloomberg showed there was a liquidity surplus in the first half of August, while the second half saw a deficit. However, since 8 October, system liquidity has been in a deficit mode with the deficit widening to as much as ₹1.46314 trillion on 22 October and settling at ₹1.15998 trillion on 30 October.
A press release from the central bank, dated 1 October, had said: “The Reserve Bank of India (RBI) had telegraphed in its previous post-monetary policy press conferences that the system liquidity will move into deficit in the second half of the fiscal year and that the evolving liquidity conditions shall determine its choice of instruments for both transient and durable liquidity management.”
The central bank has through a series of open market operations (OMO) injected liquidity into the system. Earlier this month, it announced ₹36,000 crore of OMO purchases and met its target in three tranches throughout the month. RBI has also announced another ₹40,000 crore through the same route in November. The RBI’s monetary policy has decided to adopt a neutral liquidity stance. Under this, RBI aims to keep the call money rates closer to the repo rate.
A managing director and chief executive officer at a mid-size bank said on the condition of anonymity the bank is not lending to infra-financing NBFCs after the IL&FS crisis. He said the bank is not averse to lending to NBFCs but has adopted a calibrated approach on the sector.
“Our bank is lending only to NBFCs that finance short-term assets and housing, a more secured class,” said the bankers. That apart, it has doled-out incentives to banks to allow flow of funds to NBFCs. It has allowed banks to use government securities as level 1 high-quality liquid assets equivalent to the bank’s incremental lending to NBFCs and HFCs after 19 October. This will ease the mandatory liquidity coverage ratio requirements for banks and they will have more funds to lend. Besides, RBI has allowed banks to lend up to 15% of their capital funds to a single non-infra funding NBFC from the earlier 10%. The measures are available up to 31 December this year.
However, RBI has contested the centre’s view that NBFCs are facing a liquidity crunch. Mint reported on 31 October that during the Financial Stability and Development Council (FSDC) meeting, finance ministry officials asked RBI not to let the liquidity situation in NBFCs get out of hand as there was a risk of it spilling over to other sectors. RBI replied there is robust credit growth and it does not have any data to suggest NBFCs are facing a liquidity crunch.