The rapidly expanding COVID-19 pandemic and the resulting
lockdown to slow the spread of the infection has led to severe pain for the
economy. With factories closed, businesses shut and construction halted,
several sectors are in dire need of help. The Indian financial sector was
already reeling under a burden of non-performing assets when the pandemic
struck. Considering the stress in the financial sector, which includes banks
and non-banking finance companies, the Reserve Bank of India has been
announcing a slew of relief measures.
Continuing with the trend, the RBI governor Shaktikanta Das today
announced a number of liquidity boosting measures targeted at NBFCs and other
financial intermediaries. The focus was on providing much-needing funds to
NBFCs and Micro Finance Institutions which have been suffering due to a
liquidity crunch. The RBI has taken a two-pronged approach to help shadow
bankers in need. The central bank announced a Targeted Long Term Repo Operation
(TLTRO) worth Rs 50,000 crore to boost the overall liquidity in the market. Let
us briefly understand TLTRO to get a clear idea of how it will help financial
intermediaries.
The TLTRO is a tool that helps banks access long-term credit
ranging from one to three years from the central bank at the repo rate. In lieu
of the funds received under the TLRTO scheme, banks have to provide government
securities of equal or longer tenure as collateral. In normal circumstances,
the RBI offers short-term liquidity through tools like liquidity adjustment
facility (LAF) and marginal standing facility (MSF). Through TLRTO, banks get
access to cheaper capital which, in turn, incentivises them to lend and boost
economic activity.
The TLRTO announced today is specifically aimed at helping NBFCs
and MFIs. The RBI has mandated that banks availing the facility should provide
at least half of the amount to small NBFCs and MFIs. The RBI will release the
amount in tranches and also signalled that the amount to be disbursed through
TLRTO could be increased in the future if required. Banks will have to make the
investments mandated under the conditions of TLRTO within a month of RBI
auction. By specifying a timeframe and mandating availability for NBFCs, RBI
has ensured relief for shadow banks suffering from a liquidity crunch.
Additional Read:- RBI Press Conference on Monetary Relief Measures in the Time of COVID-19: Key Takeaways
The injection of funds into the market through TLRTO has been
accompanied by several other measures like a special refinancing facility,
relaxation in asset classification norms and reduction in the reverse repo
rate.
The central bank announced a special refinance facility worth Rs
50,000 crore for all India financial institutions like NABARD, SIDBI and NHB.
The fund made available is expected to boost liquidity and help the institutions
meet sectoral lending requirements. NABARD will receive Rs 25,000 crore for
refinancing regional rural banks, co-operative banks and micro-lending
institutions. The NHB will get Rs 10,000 to support housing finance companies,
while SIDBI will get the balance Rs 15,000 crore. The Rs 10,000 crore
exclusively made available for the NHB will provide liquidity to fund-starved
HFCs and will eventually trickle down to cash-strapped developers.
The relaxation in asset classification norms will help banks give
relief to borrowers. As per existing norms, lenders have to classify accounts
that miss payments for 90 days as non-performing and make provisions. RBI today
allowed relaxation in classification by excluding the 3-month moratorium period
from the classification. It has essentially increased the period for
classification of an account as NPA from 90 days to 180 days. However, banks
will have to maintain 10% provision even for accounts that avail moratorium so
as to maintain sufficient buffers. Earlier, there was some confusion on banks
offering moratoriums to NBFCs due to the asset classification requirements.
With the relaxation in asset classification rules, NBFCs will also have more
flexibility to provide relief to borrowers.
The RBI has been trying to boost credit availability for
borrowers for a long time. The central bank had reduced the repo rate on
multiple occasions in 2019, but the transmission by banks was limited. With the
risk of worsening economic slowdown, banks were reluctant to lend. The central
bank has reduced the reverse repo by 25 basis points to 3.75%. This comes on
the back of a 90 basis point cut in the reverse repo in March. A lower reverse
repo rate makes it less lucrative for banks to deposit money with the RBI and incentivizes
lending. As of April 15, funds under the reverse repo window was at Rs 6.9 lakh
crore. The cut in the reverse repo rate will encourage banks to deploy the
funds for lending purposes.
All the measures announced today when considered together are expected to ease financial stress and boost liquidity. The measures were clearly aimed at helping NBFCs. HFCs, MFIs and co-operative banks. NBFCs are one of the biggest lenders to small businesses, while HFIs are crucial for the health of the real estate industry, which is the second-largest employer in the country. Similarly, MFIs cater to nearly 5.6 crore borrowers, a bulk of them from the lowest strata of the society.
Additional Read:- Finance Minister’s Announcements on Relief Measures over Coronavirus lockdown
Overall the measures will help financial intermediaries tide over the liquidity crunch in the market. Most of the measures announced today will have an indirect impact on customers. NBFCs and HFCs will be able to offer the three-month moratorium permitted by the RBI last month to their borrowers. Several NBFCs, HFIs and MFCs were wary of offering the moratorium due to the strict asset classification requirements. They are likely to offer relief to borrowers with the relaxation of norms and the availability of ample liquidity. Easing of the liquidity crunch is expected to have a trickle-down effect. With no dearth of funds, financial intermediaries will actively help borrowers in need of credit facilities. The RBI had already reduced the repo rate in March, reducing the cost of capital for banks. The central bank has also allowed lenders to offer a three-month moratorium to borrowers. When combined with the measures announced today, the RBI has taken adequate confidence-building measures to stabilize the financial sector and boost economic activity.
FAQs about RBI’s Liquidity Measures for NBFC
What measures are taken to control NBFC?
Non-Banking Financial Companies (NBFCs) are regulated by the Reserve Bank of India (RBI) through stringent guidelines on capital adequacy, asset classification, and periodic audits to ensure financial stability and protect consumer interests.
Does RBI control NBFC?
Yes, the RBI regulates and controls the functioning NBFCs in India in accordance with Chapter III B of the Reserve Bank of India Act, 1934.
What are the liquidity norms for NBFC?
Liquidity norms for NBFCs include maintaining a minimum liquidity coverage ratio and asset-liability management to ensure they can meet short-term obligations and manage risks effectively.
How does RBI manage the liquidity in the financial system?
The RBI infuses liquidity in the financial system through the repo rate and extracts it via the reverse repo rate under its liquidity adjustment facility. After assessing its liquidity conditions, the RBI uses a 14-day variable rate repo and, or reverse repo operation.
19 September 2024
6 mins read
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