RBI stiffens rules, makes loans costlier for NBFCs to borrow

The Reserve Bank of India (RBI) on Friday intervened, and made it harder for the non banking financial companies (NBFCs) to borrow from the commercial banks, hence making the credit flow slower, and more costly, the Financial Express reported.

Now on, any loan to an NBFC which is due to pay to the banks Rs 200 or above, and has no ratings, will now lure a risk weight of 150 per cent. Even NBFC which was rated previously but later un-rated, and owes Rs 100 or plus, will pull a risk weight of 150 per cent, reported the Financial Express.

Basically, the central bank stiffened risk-weight norms for loans to NBFCs, making them equal to other companies.

The initiative comes on the middle of liquidity deficit in the money market. Lately, NBFCs and housing finance companies (HFCs) are facing financing and liquidity issues among issues over asset-liability imbalances and company administration and control failures at some of the organizations.  

Real estate financiers, who had borrowed short term money from mutual funds, have been affected the most, partly due to redemptions from liquid schemes and debt schemes.

Real estate financiers, who took short term loans from mutual funds, were most impacted, somewhat because of redemptions from liquid schemes and debt schemes.

Although, the National Housing Bank had expanded the refinance ranges for the HFCs to smoothen the situation.

Sales in residential real estate have got silenced for decades now and builders are relying heavily on the refinance limits to make their debt burden less. NBFCs are now left with no access to funding from mutual funds.

In a recent note, investment bank Nomura wrote, “Our analysis of January 2019 data of MFs indicates their funding to NBFCs/HFCs was static between December 2019 and January 2019, and has dipped 20 per cent from the peak. With new risks relating to loan against shares and corporate governance issues in some HFCs, we believe risk aversion by MFs in funding NBFCs/HFCs will continue”, reported the Financial Express.

The report states, the Kotak Institutional Equities (KIE) noticed, NBFCs’ borrowing costs have decreased during October 2018 and January 2019, than in August 2018, before the liquidity crisis emerged,

The Financial Express reported, “As indicated in the Statement on Developmental and Regulatory Policies dated February 07, 2019, it has been decided that exposures to all NBFCs, excluding Core Investment Companies (CICs), will be risk weighted as per the ratings assigned by the rating agencies registered with SEBI and accredited by the Reserve Bank of India, in a manner similar to that of corporates,” the central bank stated in a notification on its website.

Currently, all unrated claims on corporates, asset finance companies (AFCs), and NBFC-Infrastructure finance companies which are indebted to the banking system with payments above Rs 200 crore create a risk weight of 150 per cent. Also, companies which took loans of over Rs100 crore, was rated earlier but was unrated later on also generate a risk weight of 150 per cent, the Financial Express reported

The report also stated, the RBI balanced out different categories of NBFCs into fewer ones based on the principle of regulation by activity rather than regulation by entity, the apex bank said in a separate notification. The RBI mentioned, “Accordingly, it has been decided to merge the three categories of NBFCs like asset finance companies (AFC), loan companies (LCs) and investment companies (ICs) into a new category called NBFC — Investment and Credit Company.”

The report lastly added, regulations administering bank exposures to each category of NBFCs stand adjusted accordingly. Additionally, a deposit borrowing NBFC-ICC shall be able to invest only up to 20 per cent of its owned funds in unquoted shares of another company which is not a subsidiary company or a company in the same group as the NBFC.

(With agency inputs)