RBI to address asset-liability mismatches among NBFCs

In the wake of the default crisis at Infrastructure Leasing and Financial Services (IL&FS), the Reserve Bank of India (RBI) is looking to tighten norms for non-bank lenders to address the mismatch in their assets and liabilities.

Some of the NBFCs or the non-banking financial companies have resorted to seeking too much short-term capital to finance long-term projects, said RBI Deputy Governors Viral Acharya and N Vishwanathan at the post-monetary policy press conference.

"They use diverse sources of funds and even tap the market. Some have resorted to increased market borrowings in the form of CPs (commercial papers) and that could result in Asset Liability mismatches (ALM), more so for companies lending to long-term funding such as infrastructure. There is an ALM guideline but we are looking at strengthening them so as to avoid the roll-over risk going forward," Vishwanathan said.

As a cautionary measure, the central bank has already started an inspection of several NBFCs to assess their exposure to high-risk assets, sources had told Moneycontrol.

He added that in the wake of anxiety in the NBFC sector, RBI is closely monitoring the sector.

Over the past one month, the infrastructure financier IL&FS along with its subsidiaries, has witnessed severe liquidity crunch leading to default on its repayments to the borrowings through various short-term debt instruments.

Apart from concerns of further defaults by other NBFCs, this has also led to increased borrowing costs for such non-bank firms thereby raising more concerns of defaults going forward.

Since early this year, the banking regulator initiated the process of weeding out many non-compliant small NBFCs and the total licences cancelled so far has increased to 4,230.

According to Vishwanathan, NBFCs have a CRAR (capital to risk-weighted assets ratio) of 15 percent and have a high density of risk-weighted assets.

"Core investment companies are for the purpose of making investments in the groups – 90 percent of their investments must be to their group entities of which 60 percent should be equity. The framework is that they must have a debt-equity ratio of 2.5 at the entity level and not group level," he said.

He assured that the NBFC sector plays a critical role in meeting the different credit needs of particularly the informal sector and overall the sector remains strong along with robust regulatory and supervisory framework.

Acharya said chasing lower marginal cost of funding to acquire more market share in lending is a myopic strategy. And it is associated with a significant rollover risk in the medium term and the practice seems to have led to a maturity rat race in the financing of the financial sector.

On IL&FS, Vishwanathan said: "We believe that these isolated events should not be seen as having any system-wide implications…The NBFC sector is overall pretty strong and the regulation and supervisory framework is robust."

Also Read: Better safe than sorry: RBI starts inspecting NBFCs for exposure to high-risk assets