The Reserve Bank of India (RBI) has decided to increase the single-borrower exposure limit of banks for non-banking finance companies (NBFCs) which do not finance infrastructure, to 15% from the existing 10% of their capital funds.

This would be effective till December 31, the RBI said in a statement.

The move must be read in the context of the IL&FS imbroglio-induced liquidity crisis in the system.

IL&FS payment default

The central bank has been taking several initiatives, including intermittent open market purchase of government securities, ever since the occurrence of a series of payment defaults by IL&FS and its arms which had culminated in the Centre disbanding the entire board of the infrastructure company and appointing a new one in its place under the leadership of Uday Kotak.

The Reserve Bank has also permitted banks to use government securities, equal to their incremental outstanding credit to NBFCs, over and above their outstanding credit to them as on October 19,to meet the liquidity coverage ratio requirement.

“It has been decided that, with immediate effect, banks will be permitted to also reckon 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 Level 1 HQLA((high quality liquid assets) under FALLCR (Facility to Avail Liquidity for Liquidity Coverage Ratio) within the mandatory SLR (statutory liquidity ratio) requirement,” the RBI said.

This would be in addition to the existing FALLCR of 13% of NDTL and limited to 0.5% of the bank’s NDTL (net demand and time liability), the RBI said. The additional window will be available up to December 31, 2018, the notification said.

On September 27, the RBI had said that banks could avail higher liquidity with effect from October 1 as it had enhanced the Facility to Avail Liquidity for Liquidity Coverage Ratio from the existing 11% to 13% of their deposits. Liquidity coverage ratio refers to highly liquid assets that financial institutions need to hold in order to meet short-term obligations.