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Event update: Financials - RBI’s new liquidity measures for NBFCs

RBI has come up with two measures to boost flow of bank funds to NBFCs: It has been decided that, with immediate effect, banks will be permitted to reckon Government securities held by them up to an amount equal to their incremental outstanding credit to NBFCs and Housing Finance Companies (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 - the Facility to Avail Liquidity for Liquidity Coverage Ratio -  (within the mandatory SLR requirement). This will be in addition to the existing FALLCR of 13 per cent of NDTL, and limited to 0.5 per cent of the bank’s NDTL. The above additional FALLCR will be available up to December 31, 2018. 2) The single borrower exposure limit for NBFCs which do not finance infrastructure stands increased from 10% to 15% of capital funds, up to December 31, 2018.

Purpose of these measures: We believe RBI has come up with these measures because 1) The incremental cost of lending to NBFCs has shot up and these measures can soften the pricing for NBFCs a bit 2) Banks are close to their internal limits of lending to NBFCs set by their Boards – these internal limits are usually defined as proportion of loan exposures not capital funds. While bank Boards are free to revise these limits any time, they have been apprehensive given the current situation of NBFCs. RBI relaxing single borrower limits is a signal to bank Boards that they can relax the internal limits. These measures are a clear signal from RBI that they want to ease the liquidity crunch faced by NBFCs. 3) Banks like SBI have increased limits of portfolio buyouts from HFCs/NBFCs. RBI wants to ensure that RBI’s exposure caps do not come in the way of these buyouts.

Single versus group limits: RBI has relaxed single borrower exposure limits not group. We believe many banks may have breached group exposure norms for 1-2 groups but only a few may have breached single borrower norms for NBFCs/ HFCs. Even if single borrower limits are relaxed but the bank is in breach of group borrower norms, it will not be possible to lend to a single entity within that group. As such these limits will be more beneficial to companies that are part of smaller groups or are single borrowers (such as Dewan, IBHF, SHTF) rather than big groups like Aditya  Birla, Tatas.

Banks need to be cautious: We believe this move is more positive for stressed NBFCs that are seeing a severe liquidity crunch. Better rated names like Bajaj Finance, HDFC, MMFS can raise funds even without these measures, though at a higher cost. Banks increasing their exposure to stressed NBFCs will likely be a risk to future asset quality. As of now, banks say they are cautious.

Tighter norms: Amidst worries of RBI tightening norms for NBFCs / HFCs including tighter ALM norms and new LCR norms, RBI has come up with measures to ease their crunch. We have been of the view that while norms for NBFCs /HFCs will be tightened, RBI will come up with these norms only after a few months, once the situation settles.