FIDC”NBFC Liquidity Crisis-Hype and Reality”

by Suman Gupta

Finance Industry Development Council (FIDC) is a Self-Regulatory Organization (SRO) cum Representative Body of the NBFCs registered with the Reserve Bank of India.  FIDC was formed 14 years ago, and is the recognized face of the NBFC sector. We have been engaged in regular interaction both with Reserve Bank of India and Govt. of India, which include pre-budget meetings and also important policy related meetings with RBI. Almost all the leading NBFCs and a large number of small and medium sized NBFCs are our members.

Reality Check

We feel that the prevailing “Liquidity Crisis” in the NBFC Sector has been hyped up to a level that it needs a reality check, in order to put things in the right perspective.

Following are the key points:

What We Seek From the Government/ RBI

Short Term Measures – Need Immediate Action

1. The crying need of the hour is to create a dedicated liquidity window for NBFCs through the banking channels. The same may be provided for a period of one year. Precedence may be drawn from a special repo window created by RBI in 2008 for banks under the liquidity adjustment facility (LAF) for on lending to NBFCs.

2. Since 1999, RBI had allowed all bank lending to NBFCs for on-lending to the priority sector, to be treated as priority sector lending by banks. This gave a huge incentive to banks to lend to NBFCs. While it ensured sufficient bank funding to NBFCs at a reasonable cost, it also facilitated banks to meet their PSL targets. However, this was abruptly withdrawn in 2011. The same arrangement may be restored urgently.

3. For Small &Medium sized NBFCs, eligibility norms for NBFCs for availing refinance from MUDRA should be made favorable by:

• Allowing all RBI registered NBFCs to avail refinance

• External Credit Rating criteria may be replaced by prescribing some additional financial parameters to be met, which may be more realistic and doable.

• The cap of 6% on the maximum spreads allowed should be done away with, since market forces ensure that the rates are within acceptable limits

Systemically Important NBFCs should be Allowed to Act as Aggregators by availing refinance from MUDRA for on lending to small and medium sized NBFCs.

Long Term Measures

1. Setup up a Permanent Refinance Window for NBFCs

A dedicated “Refinance window for NBFCs”, on the lines of National Housing Bank (which provides refinance to Housing Finance Companies) has been a long-standing demand of the NBFC sector. The Parliamentary Standing Committee on Finance in their 45th Report dated June 2003 (relating to The Financial Companies Regulation Bill, 2000) had recommended setting up of a new refinance institution for NBFCs.

1. Establishment of Alternate Investment Fund

An Alternate Investment Fund (AIF) may be established to channelize institutional funds to NBFCs.. Non-convertible debentures (secured by hypothecation of business receivables of NBFCs) could be subscribed to by the AIF for onward lending by NBFCs. These NCDs could be administered by investor trustees who could take care of the interests of the AIF and its constituents and would be subject to all extant guidelines in this regard. The manner of constitution of the AIF and the sources of its funds could be discussed further.

1. “On Tap” Issuance of Secured Bonds/NCDs

NBFCs have access to Non-Convertible Debentures (“NCDs”) having flexible tenure and rates, both through the private placement (with restrictions) and public issue. While private placements have severe restrictions on the number of investors, the frequency of issue etc., public issue of bonds tends to be very expensive, laborious and inflexible.

It is proposed that NBFCs be allowed an on-tap facility for issuance of NCDs to the retail market by making the offering of NCDs through an easy to operate and less costly procedure, but with proper governance to provide investor protection and comfort.