Mumbai: The Reserve Bank of India (RBI) on Friday announced more measures to increase liquidity flows to the non-banking financial companies (NBFCs). The RBI 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 be used to meet liquidity coverage ratio requirements.
The move will help provide liquidity to housing finance companies (HFCs) and non-banking finance companies (NBFCs) which have come under pressure following series of default by IL&FS group companies. “… 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 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 under FALLCR within the mandatory SLR requirement,” RBI said in a notification.
This will be in addition to the existing FALLCR of 13 per cent of total deposits, and limited to 0.5 per cent of the bank’s total deposits.
Liquidity coverage ratio refers to highly liquid assets that financial institutions need to hold in order to meet short-term obligations. The additional window will be available up to December 31, 2018, the notification said.
The central bank on Friday said it would allow banks to allocate up to 15 per cent of their lending to NBFCs that do not finance infrastructure projects, up from an earlier limit of 10 per cent. The move is effective up to Dec. 31, RBI said in a statement. The relaxation in lending norms by RBI follows worries over tightening credit lines to NBFCs after a series of defaults at India’s Infrastructure Leasing & Financial Services Ltd (IL&FS), spooked markets and led to a major sell-off in the stocks of many NBFCs.
Earlier this month, the Indian government stepped in to take control of IL&FS saying it feared its collapse would cause “catastrophic” damage to the financial markets and the economy. This week a loan default by real-estate developer Supertech, based in New Delhi, has further panicked investors, leading to further sell-offs in NBFCs with any potential exposure to real estate. Supertech’s chairman told a local newspaper on Wednesday that Supertech had overshot its loan service deadline by 15 days to two state-run banks, but he said the firm was still servicing its debt from NBFCs regularly.
This followed an Oct. 10 downgrade of its loan facilities by ratings agency Brickwork Ratings which slashed its Rs 1,866 crore of bank loans to junk, citing cashflow mismatches on account of a slowdown in the real estate sector. “There is lot of fear and uncertainty among investors and any such default news which could lead to a credit loss is creating more uncertainty,” said Ajay Manglunia, head of fixed income advisory at Edelweiss Financial Services. “Clearly this shows that investors don’t have any more appetite for credit losses in the non-bank finance space.”
NBFC stocks continue free fall
NBFC stocks continued to slump, dropping up to 18.5 per cent on Friday, on liquidity concerns even as the Reserve Bank announced more measures to increase liquidity flows to the non-banking financial companies. Shares of PNB Housing Finance dived 18.55 per cent, Indiabulls Housing Finance plunged 17.06 per cent, DHFL slumped 10.37 per cent, Mahindra & Mahindra Financial Services fell by 3.20 per cent, Ujjivan Financial Services declined by 0.82 per cent and Shriram Transport Finance softened by 0.21 per cent on the BSE. Shares of non-banking financial companies (NBFCs) had seen massive selling pressure Wednesday also. Stock markets were closed Thursday for Dussehra.
Liquidity crunch to hit home loan sales
The liquidity squeeze will slow down non-banks home loan disbursements, a report said. Home prices, which have witnessed a slowdown in growth, will continue to be under pressure, Japanese brokerage Nomura has said. “Housing loan disbursement by shadow banking companies is set to slow down due to the ongoing liquidity squeeze,” it said. Banks can “cannibalise” a part of this, leading to an uptick in their market shares, it said, but adding this will come at a higher cost for borrowers. It said real estate developers, which are already under pressure due to rising inventories, will also face troubles owing to non-banks’ inability to lend. It can be noted that non-bank lenders are facing a liquidity squeeze due to potential asset liability mismatches in a rising interest rate environment.
