RBI to back IL&FS board's solvency bid

The Reserve Bank of India (RBI) governor Urjit Patel said the central bank will support the solvency efforts of the government and the newly constituted board of IL&FS by providing necessary assistance. "The RBI will engage with the new management, if necessary, on assistance in its efforts going forward," Patel said while announcing the latest monetary policy review. "The well-structured institutional measures taken by the central government in the IL&FS case have been timely and appropriate. These have helped stabilise the situation," Patel added.

The central bank is looking to strengthen norms to address the mismatch in assets and liabilities of non-bank lenders after defaults by IL&FS which has increased the volatility and lack of confidence in the money markets pushing up the funding cost for the non-banking finance companies (NBFCs).

"NBFCs have seen tremendous growth and to finance that they tapped the market to avail short-term debt. To manage marginal cost, some of them resorted to increasing market borrowing in the form of CPs (commercial papers)," he said.

"We are looking at strengthening asset-liability management guidelines to avoid rollover risk going forward. We also believe that isolated events should not be seen as having any system-wide implications," NS Vishwnathan, RBI deputy governor, said in the post policy press conference.

With the reversal in the interest rate cycle and the end to easy liquidity facilitated in part after the demonetisation the NBFCs are likely to face liquidity challenges.

"Chasing lower marginal cost of funding to acquire more market share in lending is a myopic strategy. And it's associated with a significant rollover risks in the medium term and the practice seems to have led to a maturity rat race in the financing of the financial sector," said Viral Acharya, deputy governor, RBI, in a press conference.

Meanwhile, in the secondary commercial paper (CP-short term bond) market, the 3-month CP rate jumped by 1.20% following the default on debt obligation by IL&FS. This raised concerns on the liquidity shortage in the NBFCs sector. The equity market registered significant losses with the BSE Sensex declining by 2,418 points (6.3 per cent), triggered by the default, RBI said in its fifth monetary policy report of 2018-19.