The Reserve Bank of India (RBI) on Friday stepped in to slow the flow of credit flow to non-banking financial companies (NBFCs) by making it more expensive for banks to lend to them.
A loan to an NBFC which owes banks Rs 200 crore or more and is un-rated will now attract a risk weight of 150%. Any NBFC to which banks have an exposure of `100 crore or more which was earlier rated but subsequently un-rated will also attract a risk weight of 150%.
In essence, the central bank tightened risk-weight norms for loans to NBFCs, bringing them at par with other corporates.
The moves comes amid a fair bit of nervousness surrounding a shortage of liquidity in the money markets. Of late, NBFCs and housing finance companies (HFCs) have been facing financing and liquidity pressure amid concerns over asset-liability mismatches and corporate governance failures at some of these institutions.
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.
However, the National Housing Bank had increased the refinance limits for HFCs to ease the situation.
Sales in residential real estate have been muted for years now and builders are heavily dependent on refinancing to ease their debt burden. NBFCs are also losing access to funding from mutual funds (MFs).
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% 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.”
While NBFCs’ borrowing cost eased between October 2018 and January 2019, they remain higher than in August 2018, before the liquidity crisis ensued, Kotak Institutional Equities (KIE) observed.
“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 said in a notification on its website.
As of now all unrated claims on corporates, asset finance companies (AFCs), and NBFC-IFCs (infrastructure finance companies) which owe the banking system more than `200 crore attract a risk weight of 150%. Moreover, companies with bank borrowings of over `100 crore —rated earlier but unrated thereafter — also attract a risk weight of 150%.
In a separate notification, the RBI harmonised different categories of NBFCs into fewer ones based on the principle of regulation by activity rather than regulation by entity. “Accordingly, it has been decided to merge the three categories of NBFCs viz asset finance companies (AFC), loan companies (LCs) and investment companies (ICs) into a new category called NBFC — Investment and Credit Company (NBFC-ICC),” the RBI said.
Regulations governing bank exposures to each category of NBFCs stand harmonised accordingly.
Further, a deposit taking NBFC-ICC shall be able to invest only up to 20% 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.