RBI turns back on lending credit to the troubled NBFC’s

In its earlier commitments to relax lending norms for non-banking finance companies (NBFC’s), RBI seems to be withdrawing itself from providing the firms, any further relief. On November 2, the national bank, allowed banks to boost partial credit enhancement (PCE) facility to non-banking financial companies, and housing finance companies.

NBFCs and HFCs are in a situation of confidence crisis, and are expected to meet their debt obligations by November. This, has further led to a catastrophic situation for the sector, due to liquidity crisis, with the credit demand being around Rs 1 trillion. In order to improve the credit worthiness of the NBFCs, the RBI sought to provide a liquidity cushion for the distressed sector.

But however, it may withdraw its support from the sector. In its recent advances towards the issue, the withdrawal has been confirmed as The Reserve Bank of India (RBI) has cancelled certificate of registration of 65 NBFCs.  The unpredicted action was informed through two separate notifications, today.

According to KKR India’s chief executive officer Sanjay Nayar “NBFCs saw heavy selling pressure following the IL&FS defaults since late September as investors raised concerns over the rising cost of borrowing.

The support provided by RBI was already raising questions regarding its effectiveness. Even with its immediate implementation, analysts were uncertain about the impact the new credit enhancement facility will create.

Icra, the domestic rating agency, created a distinction between the corporate sector, and the NBFCs. It voiced its concerns that the non-bank lenders are not issuing any PCE-backed debt instruments, like the corporate sector, which has not been able to raise any debt despite the same facility being available to them for three years.

Additionally, it said the RBI guidelines on PCE state that the drawn PCE facility would become payable within a period of 30 days, which is a “restriction”.

Another source also said, that the move made by RBI was an intelligent one, thinking it as a “good corrective action to curtail bankruptcy in the country”

Although PCE debt structures have the potential to help issuers reach out to a wider set of investors like those, who would be unable or unwilling to invest in their stand-alone debt; “in reality”, in the absence of any significant rating enhancement, this benefit is unlikely to be achieved in a big way, the agency alleged.