RBI Ready To Be Lender Of Last Resort For NBFCs, But It’s Not Needed As Of Now, Says Acharya

The RBI is ready to be the lender of last resort for NBFCs if required, said Acharya.

RBI Deputy Governor Viral Acharya during an interview in New York. (Photograph: BloombergQuint)
RBI Deputy Governor Viral Acharya during an interview in New York. (Photograph: BloombergQuint)

The Reserve Bank of India is ready to be the lender of last resort for non-banking financial companies if required, but it doesn’t see the need for such a measure “given the sound health of the economy”, said Deputy Governor Viral Acharya at a press conference following the scheduled policy review.

The comments come against the backdrop of a liquidity and trust crisis being faced by NBFCs, brought on due to defaults by once AAA-rated Infrastructure Leasing & Financial Services (IL&FS). The defaults led to concerns about roll-overs of existing liabilities of NBFCs and the possibility of more defaults.

Over the last two months, many, including government officials, have called for a special refinance window for NBFCs. Unlike banks, NBFCs do not have access to the RBI’s repo window to borrow funds.

Acharya said that the RBI is in touch with the Securities & Exchange Board of India and is tracking roll-overs of liabilities held by NBFCs. It is also tracking fresh fund raising via commercial paper. In addition, it has taken steps in a calibrated manner to ease pressure on NBFCs.

These include a relaxed concentration limit on lending to individual NBFCs, allowing partial credit enhancement for NBFC bonds and easing the guidelines for securitisation.

We want to stress that these measures have been carefully chosen from the full set of options. Based on our analysis of the reasons behind the funding stress in NBFCs and HFCs, our assessment is that these measures have collectively eased the funding stress in a steady manner and they have given NBFCs and HFCs time and the opportunity to make their own balance sheet adjustments on both assets and liabilities side,  in particular improve the duration structure of their liabilities.
Viral Acharya, Deputy Governor, RBI

Acharya added that the RBI will continue to be guided by the objective of ensuring adequate liquidity in the overall system. To this end, the RBI reassured the markets that it would continue an elevated level of bond purchases under its open market operation program. This month alone, the RBI will infuse Rs 40,000 crore.

Should more support be needed, the RBI stands ready to act as a lender of last resort, assured Acharya. But he added that the RBI sees no need for this right now.

The Reserve Bank is guided by and large by the principal of addressing system-wide liquidity. The RBI also stands ready to be the lender of last resort but that is provided that conditions warrant that sort of an extreme measure. In our assessment, there is no such necessity at present, given the sound health of our economy.
Viral Acharya, Deputy Governor, RBI

RBI Assures On Credit Growth

Total flow of resources from the bank and non-bank sector to the commercial sector increased by over 50 percent year-on-year as on Nov. 23, Governor Urjit Patel said during the press conference. But the RBI’s stance is at odds with the data collated by others.

Growth in assets managed by non-banking and housing finance companies is expected to half to about 9 to 10 percent in the second half of this fiscal because of funding-access constraints, Crisil said in a press statement. The report, released before the MPC statement, said in October and November, non-bank lenders curtailed disbursements by 20 to 40 percent over the first half, especially in the non-retail segments.

Earlier, Raman Aggarwal, chairman of FIDC, a self-regulatory organisation for NBFCs, said disbursements declined by 15 percent year-on-year and 30 percent over the previous month in October.

India Monetary Policy: Status Quo On Interest Rate And Stance