RBI shifts gear on NBFC liquidity concerns, says financing in best shape since IL&FS implosion

Kolkata: Non-banking finance companies' access to finances is probably in its best shape since the implosion of IL&FS even as the borrowing cost has also come down, the Reserve Bank of India said.

This is a significant shift from the view in the RBI’s financial stability report released in July, which had flagged continued liquidity concerns for NBFCs.

“Market financing conditions for NBFCs, which had become challenging, have largely stabilised in the wake of targeted policy measures,” RBI governor Shaktikanta Das said Thursday.

He said even as non-food bank credit growth had slowed to 5.8% year-on-year as on July 8 from 12.2% a year earlier, bank loans to NBFCs grew 25.7% in June. Loans to services rose 10.7% and housing increased 12.5% in the same period.

For three-year NBFC bonds rated AA-plus, spreads over similar-tenor government securities have narrowed to 139 basis points as on July 31 from 360 basis points on March 26. The rates on commercial papers have softened to 3.80% for NBFCs and 3.40% for non-NBFC borrowers as on July 31, from in excess of 6% a year back.

Das attributed this trend to the “abundant liquidity” made available to the inter-bank system. The RBI had since February announced liquidity measures aggregating to about Rs 9.57 lakh crore, which is equivalent to about 4.7% of 2019-20 nominal GDP.

“Abundant liquidity has supported other segments of financial markets too. In particular, MFs (mutual funds) have stabilised since the Franklin Templeton episode. Assets under management of debt MFs, which fell to Rs 12.20 lakh crore as on April 29, recovered and improved to Rs 13.89 lakh crore as on July 31,” the governor said.

Market practitioners said that the availability of finance is most prominent for the top rated borrowers while the absence of credit demand has helped in improvement in liquidity for others.

"The central bank has decided not to extend the moratorium and has instead allowed lenders to restructure some loans which is a positive change as account classification will remain standard and this will also ease provision requirements ahead. This is a welcome step and coupled with earlier measures taken by the regulator to ensure adequate liquidity and bring down borrowing costs, it will surely enhance the financial stability of the system," said Umesh Revankar, MD at Shriram Transport Finance.

In the latest financial stability report, the financial regulator had raised concerns over possible capital erosion of NBFCs given the enhanced systemic risks in the context of Covid-19, which has put the entire financial system to test.

The capital to risk weighted assets ratio (CRAR) of the NBFC sector has fallen to 19.6% at the end of March 2020 from 26.2% in March 2015.

As many as 9,601 NBFCs are registered with the RBI of which 66 are allowed to raise deposits from the public and 278 are systemically important. The NBFCs are known to have achieved the last-mile connectivity in credit delivery, better than banks. Their combined balance sheet size is about one-fifth of that of scheduled commercial banks.