NBFCs may face curbs on short-term borrowings

MUMBAI: Non-banking finance companies (NBFCs) will soon to find it difficult to borrow temporary and deploy the finances in long-term belongings. Following the liquidity crisis in IL&FS, the RBI is coming out with new norms to make certain that finance companies don't run asset-liability mismatches.

RBI governor Urjit Patel on Friday mentioned that the well-structured institutional measures taken via the government in the IL&FS case were “well timed and appropriate”. “These have helped to stabilise the situation. The RBI will engage with the new management if essential for assistance in its efforts,” he mentioned.

According to RBI deputy governor N S Vishwanathan, beneath new guidelines, a core funding company — which incorporates the likes of IL&FS — should have 90% of its publicity limited to workforce entities and 60% of this should be in the form of equity. CIC’s could have handiest limited borrowing and feature a maximum debt-equity ratio of two.five:1 on the entity level (and now not the gang level). This stance of the RBI is more likely to have implications for resolution plans for IL&FS, which has important borrowing. He mentioned that whilst asset-liability management norms have been already in position, the RBI shall be coming out with new norms.

One of the triggers for the crisis in IL&FS is seen to be the establishment’s reliance on borrowing, just like the three-month industrial paper, whilst most of its belongings have been extremely long-term infrastructure belongings. Besides IL&FS different NBFCs have also been tapping the commercial paper market to lift finances at decrease costs although they've been lending for long-term like housing finance.

“The RBI, along with the government and Sebi, has been carefully monitoring the situation and would like to inspire monetary companies to put higher reliance on equity and long-term funding quite than relying on temporary wholesale paper,” mentioned RBI deputy governor Viral Acharya. He mentioned that the RBI used to be wary of businesses chasing decrease marginal cost of finances to gain market share in a scenario of tightening liquidity. He described it as a “myopic strategy” related to important rollover risks which has ended in a maturity rat-race in the monetary sector.

Vishwanathan mentioned RBI’s law of NBFCs is in line with 3 principles—coverage of depositor interest (for deposit-taking companies), healthy customer interface and warding off systemic risks. Early this yr, the RBI has began hunting down non-compliant small NBFCs. “We have also moved against harmonizing rules and entirely synchronized NPA norms with the banking machine,” mentioned Vishwanathan.

NBFCs may face curbs on short-term borrowings NBFCs may face curbs on short-term borrowings Reviewed by kailash soni on October 06, 2018 Rating: 5
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