RBI to have fresh look at NBFC supervision: All you need to know about what's ailing India's shadow banking sector
Many large NBFCs have come under severe liquidity pressure, compelling them to bring down their reliance on commercial papers following series of default by group companies of IL&FS
Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot
Recently, DHFL was downgraded on a concern of default in payment obligation towards commercial papers
RBI had asked NBFCs with more than 50 billion rupees ($714 million) in assets to appoint a chief risk officer
Concerned over the stress in the NBFC sector, RBI Governor Shaktikanta Das on Saturday said there is a need to have a fresh look at the regulation as well as supervision, and added that the central bank will come out with guidelines on liquidity risk management framework shortly.
He also expressed hope that the Board of Directors of non-banking financial companies (NBFCs) to act diligently and take necessary action based on Reserve Bank's supervision reports.
Das said, "Our objective is to harmonise the liquidity norms between banks and NBFCs, taking into account the unique business model of the NBFCs vis-a-vis banks. In this context, the final guidelines on the liquidity risk management framework, which we have proposed recently, will be issued shortly".
The Reserve Bank of India (RBI) last month issued a draft circular on liquidity risk management framework for NBFCs and core investment companies.
Here is everything to know about the NBFC crisis:
Many large NBFCs have come under severe liquidity pressure, compelling them to bring down their reliance on commercial papers following series of default by group companies of IL&FS beginning September last year.
Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot. There are concerns that NBFCs may run out of money, which will lead to defaults.
According to estimates, about Rs 1 lakh crore of commercial papers (CPs) raised by NBFCs from investors will come up for redemption in the next three months. CPs are debt instruments issued by companies to raise funds for a time period of up to one year. Recently, DHFL was downgraded on a concern of default in payment obligation towards CPs.
SBI closely monitors exposure to shadow banks
Last week, State Bank of India (SBI) said it was “very closely” monitoring its exposure to the country’s shadow banks, amid concerns of distress in the sector. SBI, India’s largest lender by assets, said it had “factored in” challenges faced by accounts like DHFL and has already estimated the stress the bank would have to deal with in this financial year due to the shadow banking crisis.
The bank did not break out any details on the extent of its exposure to the sector but said the overall quality of its NBFC asset portfolio continued to be good.
"Credit growth unlikely to pick up"
Credit growth is unlikely to pick up despite the three successive rate cuts by the central bank due to the capital constraints at banks and the deepening crisis in the non-banking lenders sector, global rating agency Fitch warned recently. "We expect credit growth to remain slow, despite the latest interest rate cut, as most banks are capital- constrained and non-banking financial institutions are facing tighter funding conditions," Fitch said in a note. "Liquidity of NBFCs is sensitive to market sentiment as their business models rely on short-term wholesale funding, which can dry up fast if market sentiment turns negative," the report said and explained that because of these pressures, top NBFCs have begun to explore other sources of funding and are working onto start tapping the overseas bond markets.
Govt thinks there is an "imminent crisis" in NBFCs sector
Corporate Affairs Secretary Injeti Srinivas last month said there is an "imminent crisis" in NBFCs sector as misadventures by some large entities and credit squeeze present a perfect recipe for disaster. Srinivas said the NBFC sector is facing issues of the credit squeeze, over-leveraging and misadventures by some large entities. "There is an imminent crisis in the NBFC sector. There is a credit squeeze, over-leveraging, excessive concentration, massive mismatch between assets and liabilities, coupled with some misadventures by some very large entities, which is a perfect recipe for disaster," Srinivas had said.
RBI's proposal to introduce LCR for large NBFCs
On 24 May, RBI proposed introducing a liquidity coverage ratio (LCR) for large non-banking finance companies (NBFC) to help tackle liquidity problems in the sector. The central bank said it planned to implement LCR, a liquidity buffer, “in a calibrated manner” over four years starting from April 2020. The LCR is proposed for all deposit-taking NBFCs, and non-deposit taking NBFCs with an asset size of Rs 5,000 crore ($720 million) and above.
NBFCs will have to maintain minimum high-quality liquid assets of 100 percent of total net cash outflows over the following 30 calendar days.
NBFCs to now have risk officers
RBI has asked NBFCs with more than Rs 5,000 crore ($714 million) in assets to appoint a chief risk officer, as it tightened regulations on the sector. “With the increasing role of NBFCs (non-banking financial companies) in direct credit intermediation, there is a need for NBFCs to augment risk management practices,” the central bank had said last month. NBFCs must now appoint an independently functioning chief risk officer with clearly specified responsibilities for a fixed tenure, and who cannot be removed without board approval, RBI said.
With agency inputs
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