What are the various steps taken by RBI to address the crisis haunting the NBFC sector so far?

NBFCs or Non Banking Financial Companies are those companies which provide banking services without meeting the legal definition of a bank. The NBFCs do the business of loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by Government.

Steps taken by RBI

The IL and FS crisis has severely impacted the NBFC sector. The banking regulator RBI has taken several steps to ease the NBFC woes.

• RBI has decided to increase the single-borrower exposure limit of banks for non-banking finance companies (NBFCs) which do not finance infrastructure, to 15% from the existing 10% of their capital funds.
• RBI has permitted banks to use government securities, equal to their incremental outstanding credit to NBFC to meet the liquidity coverage ratio requirement.
• This would in addition to the existing Facility to Avail Liquidity for Liquidity Coverage Ratio of 13% of net time and demand liabilities and limited to 0.5% of bank’s net demand and time liability.
• The RBI has enhanced the Facility to Avail Liquidity for Liquidity Coverage Ratio from the existing 11% to 13% of their deposits. Liquidity coverage ratio refers to highly liquid assets that financial institutions need to hold in order to meet short-term obligations.

How IL and FS crisis has affected the NBFCs?

• The problem at Infrastructure Leasing & Financial Services (IL&FS) triggered the issue. The crisis due to default of IL and FS in meeting its payment obligations has resulted in lowering down of its impact every company in the sector.
• The default by IL&FS has forced banks, mutual funds and other fund providers to tighten lending to NBFCs. This has creatied a liquidity crisis.
• Rising borrowing costs and the turmoil in market has led to a credit crunch in the sector.
• The liquidity crunch with the NBFCs is severely impacting the smaller NBFCs.
• As the cost of borrowing is increasing for NBFCs, their stock prices have seen a dip as the market expected their profits would see the downslope due to increased cost of borrowing.

To address the crisis of the NBFC sector the RBI has come up with the measures to address the credit crunch and liquidity crisis haunting the sector.

Topics: GS-III: Indian Economy Issues Relating to Planning