RBI, on 2nd November 2018, has decided to allow banks to provide partial credit enhancement to bonds issued by the systemically important non-deposit taking non-banking financial companies registered with the Reserve Bank of India and Housing Finance Companies registered with National Housing Bank.The tenor of the bonds issued by NBFCs and HFCs, for which partial credit enhancement is provided, shall not be less than three years.The proceeds from the bonds backed by partial credit enhancement from banks shall only be utilized for refinancing the existing debt of NBFCs and HFCs. Bank exposure to these bonds is restricted to 1% of capital funds of the bank within the existing single or group borrower exposure limits.
RBI has given additional Rs 600 billion liquidity to NBFCS by permitting banks to earmark government bonds for LCR against incremental credit to NBFCs.
On October 19th, RBI permitted banks to use Government securities held by them up to an amount equal to their incremental outstanding credit to NBFCs and Housing Finance Companies (HFCs), over and above the amount of credit to NBFCs and HFCs outstanding on their books as on October 19, 2018, as under FALLCR within the mandatory SLR requirement. This will be in addition to the existing FALLCR of 13% of NDTL, and limited to 0.5% of the bank’s NDTL.This facility is available up to 31st December 2018.The single borrower exposure limit for NBFCs which do not finance infrastructure stands increased from 10% to 15% of capital funds, for the given period.
NBFCs have seen sharp fall in equity prices and sharp rise in credit spreads, that has increased their borrowing costs post the IL&FS default. We had opined that IL&FS is not reflective of the NBFC sector in our last edition of our Credit Weekly “Search for Yields”. Click here to read the report.
The addition of NBFC liquidity lines by SBI and NHB for Rs 750 billion lends comfort to the market on any near term liquidity issues faced by NBFCs. The big NBFCs are comfortable on liquidity and it is unlikely that the lines will be drawn but the backstop will keep credit flowing to NBFCs, as it is a key lending season given festivals.
NBFCs should see shorts coming off in equities and credit spreads.
To give an additional liquidity cushion to NBFCs,State Bank Of India will buy standard loans of Rs 450 billion from NBFCs in FY19,earlier target was Rs 150 billion.SBI will purchases loans from NBFCs to meet the shortfall in priority sector lending such as agricultural loans,Housing loans,SME loans.
As a regulator NHB National Housing Bank, monitors liquidity positions of housing finance companies. NHB has increased refinancing credit line by 25% to Rs 300 billion for FY19. Refinancing is a credit flow to housing finance companies and other eligible institutions. As of October 2018,Rs 88.35 billion has been sanctioned.
The government and RBI has recognized the need for prompt action to stop credit markets from freezing on IL&FS default. The government announced with immediate effect a new board for IL&FS to be headed by noted banker Uday Kotak for IL&FS to get some credibility from lenders. This should clam fears of banks who have huge exposure to IL&FS credit.
RBI is providing liquidity to markets through government bond purchases. Read our note on RBI to buy over Rs 1 trillion of bonds through OMOs.
The government and RBI may also look at the mechanism they used in 2009 to make sure NBFCs funding needs were not cut. The mechansim helped calm markets even though it was used only for a very small insignificant amount as interest rates were high for the loans and the loans were not to be used for business expansion.
RBI cannot by statute buy any other bonds apart from central government bonds. They can only indirectly intervene to calm markets.
In February 2009,The Government of India had announced an arrangement for providing liquidity support to meet the temporary liquidity mismatches for eligible Non-Banking Financial Companies-Non-Deposit Taking-Systemically Important (NBFC-ND-SI) through a Special Purpose Vehicle (SPV). The scheme had been finalised and Industrial Development Bank of India Stressed Asset Stabilisation Fund (IDBI SASF) Trust had been notified as Special Purpose Vehicle for undertaking this operation.
The Reserve Bank of India had purchased securities issued by the SPV guaranteed by the Government of India for aggregated amount of Rs.200 billion. The SPV purchased the short term paper from the issuing NBFCs directly. The short term instruments included Commercial Papers and Non-convertible Debentures, with residual maturity not more than 90 days and rated as investment grade. Initially,The facility was not available for any paper issued after 31st March,2009. Eligible NBFCs-ND-SI had approached the SPV- IDBI SASF Trust for considering their request for purchase of short term paper.
Industrial Development Bank of India Stressed Asset Stabilisation Fund (IDBI SASF) Trust, which was notified as a special purpose vehicle (SPV) for undertaking the operation, was extended for eligible papers issued by NBFCs up to 30th September,2009. The SPV ceaseed to make fresh purchases after 31st December,2009 and needed to recover all dues by 31st March,2010. The facility was availed of to the extent of Rs.750 crore and was repaid fully by July 7, 2009.