Business

RBI to tighten norms for NBFCs

MUMBAI, Oct 6 (Agencies) | Publish Date: 10/6/2018 12:06:08 PM IST

Following the crisis involving Infrastructure Leasing & Financial Services (IL&FS), the Reserve Bank of India (RBI) has decided to wield more regulatory stick on Non-Banking Finance Companies (NBFC).

On Friday, the central bank said it will tighten norms to avoid asset-liability mismatches among NBFCs. Apparently, lack of such regulations led to the current sorry state of affairs at the infrastructure major.
Until now, some companies had a drop on the lax regulations and resorted to borrowing too much short-term capital to finance long-term projects which, in RBI Deputy Governor Viral Acharya’s eyes, was a ‘myopic strategy.’ His colleague N Vishwanathan too shared a similar view, saying such events lead to rollover risks. “Chasing lower marginal cost of funding to acquire more market share in lending is a myopic strategy and is associated with a significant rollover risks in the medium-term. The practice seems to have led to a maturity rat race in the financing of the financial sector,” Acharya said.
According to Vishwanathan, core investment companies were a category of NBFCs created to fund groups. As per norms, about 90 per cent of their investments should be in group-level entities and at least 60 per cent in the form of equity. However, of late, NBFCs witnessed tremendous growth, forcing them to avail short-term debt.
“To manage marginal cost, some of them resorted to increasing market borrowing in the form of commercial papers…We are looking at strengthening ALM (asset-liability) guidelines to avoid rollover risk going forward. We also believe that isolated events should not be seen as having any system-wide implications,” he said.
Both the central bankers explained that the two regulators, RBI and SEBI, along with the government, were closely watching the developments, while RBI Governor Urjit Patel said the central bank will extend possible support to the new IL&FS Board to reach normalcy.
 

-Tags:#NBFCs

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