Mumbai: In another step to improve liquidity in non-banking finance companies and housing finance companies, the RBI on Friday allowed banks to provide partial credit enhancement to bonds issued by the systemically important non-deposit taking non-banking financial companies. Through credit enhancement, the lender provides reassurance that borrower will honour its obligation through additional collateral, insurance or a third-party guarantee.
The central bank said that partial credit enhancement should only be for bonds not less than three years, and proceeds from the bonds backed by partial credit enhancement must be utilised to refinance the existing debt of these companies. The RBI has directed banks to introduce appropriate mechanisms to monitor and ensure that the end-use condition is met. The exposure of a bank by way of partial credit enhancement to bonds issued by such systemically important non-deposit taking non-banking financial companies is capped at 1 per cent of capital funds of the bank, within 20 per cent limit of the bond issue size for investment by an individual bank.
Liquidity in the system has become a concern for non-banking finance companies and housing finance companies following the default on debt repayments by Infrastructure Leasing & Financial Services and its group companies from September. On October 19, with an aim of providing more liquidity to non-banking finance companies and housing finance companies, the RBI has allowed banks to treat government securities held by them equal to their incremental outstanding credit to non-banking finance companies and housing finance companies as high-quality liquid assets under the Liquidity Coverage Ratio requirement.
NBFCs, HFCs may default on huge debt repayment
FPJ News Service Mumbai Large non-banking finance companies (NBFCs) and housing finance companies (HFCs) are likely to default on repaying debt raised from the money market within the next six weeks if additional liquidity is not provided immediately, according to a letter from the Department of Economic Affairs to the Ministry of Corporate Affairs.
Non-bank financiers and mortgage lenders have Rs 2.7 lakh crore of debt maturing in the next five months, according to sources. According to the letter, a default could adversely impact productive sectors of the economy. The DEA, in its letter, described the financial situation as “still fragile” when discussing the financial stability impact of the Infrastructure Leasing and Financial Service’s (IL&FS) default.
It estimates a funding gap of as much as Rs 1 lakh crore by the end of the year. The DEA declined to comment on the matter. A further Rs 2.7 lakh crore of commercial paper and non-convertible debentures will be due for redemption over Jan-March next year, the letter showed. Without additional liquidity support a significant default from the largest NBFC and HFC could occur within six weeks and the financial cycle of the productive sector would be adversely affected, the DEA letter added.
Fixing the cash flow crisis at shadow banks is vital to revive confidence in the nation’s credit markets at a time when India is grappling with rising oil prices and a weakening currency. Infrastructure Leasing & Financial Services Ltd., one of the country’s non-bank financier, was taken over by the government last month after it started defaulting on its debt. Financing costs throughout India’s credit markets have ticked higher, meaning that rolling over all this debt will cost more. If the RBI refused to act on liquidity constraints, the government will not shy away from taking steps against it.