Move set to reduce banks’ cost of lending to non-banking finance firms.
The Reserve Bank of India (RBI) is examining the possibility of cutting the standard asset provisioning by banks for loans advanced to non-banking finance companies (NBFCs) from 2 per cent to 0.4 per cent. The proposal comes in the wake of the central bank’s special facility for banks to on-lend to NBFCs drawing a lukewarm response from lenders.
The move will reduce banks’ cost of lending to NBFCs substantially and enable them to advance more loans to the sector. RBI has opened a special, fixed-rate, term repo under the liquidity adjustment facility (LAF) to help finance cash-strapped NBFCs. However, banks have been hesitant to use the facility.
In February 2007, the central bank had raised the provisioning for banks’ exposure (for the standard assets category) to non-deposit-taking NBFCs to 2 per cent from the earlier 0.4 per cent.
The banking regulator is also mulling lending to NBFCs against AAA-rated commercial papers (CPs) if banks continue to refrain from lending to them.
NBFC chiefs, who did not wished to be named, said they had approached RBI and expressed their difficulty in getting funding from private and foreign banks.
| FEW TAKERS Special fixed-rate repo under LAF | |||
|
Date |
Eligible |
Bids(number) | Amount Rs crore |
| 3-Nov | 7,760 | 4/4 | 1,310 |
| 4-Nov | 52,240 | 4/4 | 1,465 |
| 5-Nov | 50,775 | 2/2 | 1,500 |
| 6-Nov | 49,525 | 2/2 | 1,250 |
| 7-Nov | 48,275 | Nil | NA |
| 10-Nov | 48,425 | Nil | NA |
| NA= Not applicable | |||
“RBI is seeking daily feedback from us. Though public sector banks are not saying no, they are not saying yes either, whereas private and foreign banks are still refusing to lend. By the weekend, if things do not improve, the regulator will surely take some measures by specially relaxing the standard asset provisioning from 2 per cent to 0.4 per cent,” said an NBFC chief.
A senior NBFC executive, who was present at the discussions with the regulator, said the industry had also requested RBI to grant funds against AAA-rated CPs.
“Banks are not lending to us. If the situation does not improve in another week, the regulator might also infuse funds directly against AAA-rated CPs,” he added.
Commercial paper is a short-term instrument through which companies raise short-term finance from banks. Usually, it gets rolled over at every maturity date to allow the flow of short-term credit to companies.
Ever since the special LAF became operational from November 3, it has got a tepid response from banks. During the first two days of auctions, eligible securities worth Rs 60,000 crore were placed at auctions, against which banks placed bids to the tune of Rs 2,775 crore. Similarly, in the last two days, no bids were placed by banks against securities worth Rs 48,275 crore.
RBI had announced that it would conduct the special LAF every day until further notice up to a cumulative amount of Rs 60,000 crore to the extent of up to 1.5 per cent of banks’ net demand and time liabilities (NDTL) to meet the funding requirements of mutual funds and NBFCs.
While banks are arguing that there are not enough proposals from NBFCs, the industry insiders said proposals generally would take time to get approved due to higher due diligence.
