New Delhi: After IL&FS defaulted on payments, which brought turmoil into the markets, the Reserve Bank of India (RBI) eased the liquidity norms on Friday and allowed banks to lend more to Non-Banking Finance Companies (NBFCs). The sector is grappling with refinancing maturing commercial paper and short term loans, but this move is estimated to free up as much as Rs 50,000 crores. The limit has been raised from 10 percent to 15 percent and is effective up to December 31, the RBI said in a statement.
The market in turmoil
NBFC stocks dropped 3-17 percent on the stock exchange after the RBI’s measures to keep the stocks from falling in the wake of a weakness across the Asian markets failed. The main benchmark indices fell over 1 percent on Friday as heavyweight stock Reliance Industries slumped following the announcement of its second quarter results. Nifty fell 149.50 points or 1.4 percent to close at 10303.55 and Sensex fell 464 points or 1.3 percent to close at 34315.63. India’s volatility gauge India VIX surged nearly 11 percent to close at 19.9. Markets were shut on Thursday on account of Dussehra. A sudden outflow from mutual funds has worsened the sentiment in India with NBFCs worrying about their ability to refinance debt. There is an imbalance between short-term borrowings and long-term investments in the NBFC sector.
How effective is the step?
The latest step is among a series of liquidity infusion measures taken by the RBI as short-term interest rates spiked despite the monetary policy committee keeping interest rates unchanged at its recent meeting. While shifting its stance to “calibrated tightening” from “neutral,” it maintained the repo rate at 6.5 percent.
Only some NBFCs may benefit from the move, experts pointed out. “While this is an important signal of regulator’s intention of ensuring market stability, the current measures may primarily benefit only select NBFCs like HDFC,’’ said Ashish Gupta, an analyst at Credit Suisse. “The LCR relaxation capped at 0.5 percent translates to a Rs 50,000 crore headroom for NBFC lending.”
Lashing out at NBFCs for their asset-liability mismatch, the RBI suggested that they should raise equity and long terms funds rather than focusing on profitability with short-term funds that create instability.
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