Before we get into the reforms and policies being established by the government to help deal with the liquidity crunch, let’s briefly discuss what got them there- the IL&FS crisis of 2018. During August 2018, Infrastructure Leasing and Financial Services defaulted in the repayment of their obligations to SIDBI. At the time, no one suspected that the NBFC/HFC industry, with an asset book of 28.4 lakh crore, would take the hit. As time progressed, people started to draw an unjust comparison between the two. This resulted in the distress of India’s capital market and the subsequent current liquidity crunch for NBFCs.
To prevent the downfall of the credit market in the country, RBI and the government have created a few temporary reform policies to pull NBFCs out of crisis mode and back on the track of growth:
- Union budget 2019-20- To dissuade the unduly risk-averse, the government will provide a one-time six months partial credit guarantee to PSBs for the first loss to the extent of 10% to support a total investment of 1 lakh crore in financially stable NBFCs. NBFCs in India have significantly contributed to boosting consumer demand and capital formation, and the default of a few shouldn’t affect all.
- Increased Exposure limit- As of 1 April 2019, the guidelines on large exposure framework has been revised to allow the flow of credit to priority sectors. The central bank increased the exposure limit to one NBFC to the extent of 20% from 15% of the Tier-1 capital of a bank, and under specific circumstances, this limit may be raised to 25%. The agriculture and MSME sectors contribute significantly to the economic growth of the country and NBFCs that lend to them can borrow up to 10 lakhs and 20 lakhs, respectively.
- Infused Capital into PSBs- The government will infuse a capital of Rs 70,000 crore into public sector banks as a measure to relieve liquidity stress and foster the flow of credit. Addressing the liquidity crunch along with the other policies put in place will reassure banks investing in the assets of highly rated NBFC. Additionally, the government is also encouraging banks to borrow from NBFCs and has allowed NBFCs, in turn, access to Aadhaar-authenticated KYCs to simplify the credit process.
The economic growth of our nation depends to a great extent on the credit lent by NBFCs, justifying the numerous initiatives being taken by the government to ease the crisis. However, the views on whether these reforms will actually help improve the situation are divided. Although these initiatives have forced a perspective shift for banks from neutral or averse, to accommodating, there’s yet a long way to go to revert the damage done.
Some NBFCs like Capri Global have progressed in the steady march towards growth while others have permanently closed their doors. On the bright side, the fear of the liquidity crisis escalating to a solvency issue hasn’t happened. If one thing is certain, it’s that NBFC have, are and will remain an essential part of the economy and we’ll have to wait and see what their future holds.