As NBFCs face redemption pressure, Reserve Bank hints at more support

The COVID-19 pandemic related disruptions have impacted market financing conditions for non-banking financial companies, which could result in higher redemption pressure and the sector would need further policy assistance, the Reserve Bank of India said.

The recent development in the mutual fund (MF) sector, which had emerged as a key source for funding to non-banks, has aggravated the situation. Based on data up to April 2020, an analysis by RBI showed while measures taken by the central bank have eased the stress, further policy interventions are required to ensure flow of funds to credit-worthy entities. The NBFC sector faced a liquidity crunch after banks turned reluctant in extending the benefits of loan repayment moratorium to them while the non-banks extended the same to their borrowers.

The analysis showed financing conditions had become challenging recently, especially for lower-rated NBFCs, due to an overall environment of greater risk sensitivity and heightened risk aversion. “There are near-term scheduled redemptions of commercial papers and corporate bonds issued by NBFCs,” RBI said.

“To a certain extent, these could be bridged through increased bank borrowing and / or group support by some NBFCs. However, given the current financing conditions and developments in the MF sector, the possibility of liquidity pressures remaining elevated for some of these NBFCs..., cannot be ruled out,” it said.

RBI said stress was still visible in certain areas of the market and developments indicate the need for policy interventions, which go beyond liquidity-related measures to credit-related ones. “There is a need for ensuring flow of credit/liquidity to NBFCs with concrete credit backstop to address the risk aversion in the system,” the study said.

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Printable version | Oct 24, 2021 5:07:15 AM |

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