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Budget 2019: Special liquidity window for NBFCs unlikely for now

FE Bureau

Budget 2019 India: Liquidity woes faced by non-banking financial companies (NBFCs) and challenges to the banking system featured prominently in the deliberations of a meeting of the Financial Stability and Development Council (FSDC) on Wednesday, chaired by finance minister Nirmala Sitharaman. However, an announcement of a special liquidity window through the RBI, as sought by the NBFCs, seems unlikely soon, a source told FE.

Sitharaman will present her first Budget on July 5, at a time when the economic growth has hit a five-year low of 6.8% in FY19.

Speaking to reporters after the meeting, RBI governor Shaktikanta Das said: As discussed in the other FSDC meetings, there was a general review of the current state of the economy, of the overall macro-economic situation, global developments. And there was a discussion on the forthcoming Budget and various Budget-related suggestions and proposals. Asked if any stimulus is required to prop up the economy, Das said, It is for the government to decide.

The RBI governor further said that the Bimal Jalan committee, which is looking into the size of capital reserves that the RBI should hold, is likely to submit its final report by June-end.

Irdai chairman Subhash Chandra Khuntia is learnt to have raked up the issue of solvency ratio of some state-run insurers. An increase in underwriting losses and higher claims have eroded the profitability of these insurers in recent years, impacting their solvency ratio. The department of financial services has sought a capital allocation of Rs 4,000 crore for infusion into three PSU insurance firms to shore up their solvency, as two of them (barring Oriental Insurance) had been struggling to maintain the solvency ratio requirement of 1.5. New India s solvency ratio, however, stood at a healthy 2.58%.

A section of the government believes that liquidity in the banking sector, a key source of financing for NBFCs, is improving, which will ultimately ease fund flow to the shadow-banking sector, said the source.

Instead of a special window, which can potentially complicate other things, the RBI may come up with other measures to ease liquidity crunch. As of now, unless the situation is alarming, a special window is unlikely, he added.

Nevertheless, the government and the RBI are closely monitoring the liquidity situation in the NBFC space.

According to a CARE Ratings report, the average net outstanding liquidity for the banking system for the week through June 7 moved into a surplus for the first time after 34 weeks (since the second week of October 2018 after the IL&FS default flared up). The estimated average net outstanding liquidity surplus for the week was Rs 84,995 crore, against a deficit of Rs 12,916 crore in the previous week. Reflecting the improvement, the call money market rate ended the week at a 4-week low of 5.86%, 17 bps lower than a week earlier.

However, while the better-off NBFCs like HDFC, LIC Housing Finance (LICHF) and Bajaj Finance are still able to raise finances (HDFC and LICHF made up for around 60% of the bond issuances in the first quarter of 2019, according to a Credit Suisse report), it s the smaller ones that face the brunt of a credit squeeze. Plus, saddled with NPAs, banks have turned risk-averse and even if the liquidity for them eases, it may not automatically flow into smaller NBFCs. A special repo window created by RBI in 2008 for banks under the liquidity adjustment facility (LAF) for on-lending to NBFCs.

Apart from Das, other financial-sector regulators Sebi chairman Ajay Tyagi, Irdai chief Subhash Chandra Khuntia were present in the meeting. Finance secretary Subhash Chandra Garg, financial services secretary Rajiv Kumar, revenue secretary Ajay Bhushan Pandey, expenditure secretary GC Murmu, corporate affairs secretary Injeti Srinivas and IBBI chairman MS Sahoo attended the meeting, along with other senior officials.