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Making sense of the NBFC’s situation; What is RBI doing to support them?

What is the problem?

The main problem is the NBFC crisis appearing over the market where the issues at hand are:

1. IL&FS fiasco: IL&FS defaulted on its payment commitments and many NBFC have massive exposure to IL&FS.

2. Maturity mismatching: Loans that is taken by NBFC's have maturity mismatching; in the sense that they have carried for a shorter period of time and expanded to real estate projects for mid to long period of time. This has a guide to banks not expanding new loans to NBFC's, since they have fear about the mismatch of the asset-liability.

3. High bond yields have posed a big problem; as they make taking the loans very expensive. Liquidity Problem is essential in the economy at this point in time and investors are pressured to sell NBFC bonds at yields as high as 11-12% as seen in the case of DSP mutual fund selling DHFL bonds.

While higher costs of funds will affect the margins and growth for the sector as a whole, the effect would be particularly pronounced for a while.

What is RBI doing about the conditions?

RBI kept the status quo unchanged by do not changing the rate of interest in its recent MPC meeting to support NBFC’s.

RBI keeps an eye to watch the NBCF's situation and is taking up all the estimations to support NBFC’s indirectly rather than directly providing a bailout to their “parent” IL&FS. It has already defined that NBFCs should depend more on equity and long-term financing for funding long-term assets alternatively of the current bond and short term financing via commercial papers. In its latest circular, RBI allowed:

1) Banks to carve out an additional 0.5% of NDTL from the ratio of statutory liquidity (SLR) securities for the computation of the ratio of liquidity coverage (LCR) for incremental lending to NBFCs/HFCs.

2) To increase their revelation to NBFCs from 10% of net worth to 15%.

Even SBI and other PSU banks notify an increase in portfolio buyout for the NBFCs. This combines with open market operations (OMO) of RBI of Rs. 360 bn and National Housing Bank (NHB) increasing its refinancing limit to Rs. 300 bn from INR240b, these are some steps we trust that will successfully decrease the commercial papers rollover risk at the system level.

What next?

The recovery of NBFC's is very important for the economy; no matter how much time it takes. The liquidity compresses holding the NBFC's and mutual funds becoming cautious of rolling over their positions which accounted for multiple subscriptions for commercial papers of NBFC and also facing some pressures for redemptions, increased serious concerns. But the steps which are taken by RBI and PSU’s should ease out a short period of time lending rollover issue for NBFC’s.

Appropriate estimations are being grabbed by RBI to cap the fall in the credit markets, though their actual effect is yet to be seen in the prices of the NBFC’s.

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