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RBI allows banks to lend more to NBFCs

The business of NBFCs is getting a boost through this step of RBI

In a recent move, RBI allows banks to lend more to the NBFCs. RBI has granted the liquidity relaxation to the banks to ease making full use of the opportunity. This step is going to loosen the tied hands of the banks and is likely to introduce around 50,000 crores into the financial market. Now, the banks can lend to the Non-banking financial companies who are facing the mismatch in asset and liquidity.

What is the asset-liability mismatch?

The investments are the assets, whether it is of an individual or of a company. And whenever an individual or a company borrows money from someone, it is the liability. The asset-liability mismatch refers to the mismatch in the long-term investment and the short-term loans.

Reception

According to the analysts, this step of the central bank is going to pump a new synergy into the Indian financial market. As soon as the news broke out, there has been positive response across the market, especially from the NBFCs.

“Today’s move by RBI will certainly ease liquidity for the NBFCs from the banking system. However, the impact will be felt more prominently by private banks that can now leverage this additional window of liquidity to lend to NBFCs,” said Sanjay Chamria, managing director of Magma Fincorp.

What the RBI has actually done?

The central bank has allowed the banks to raise their exposure from 10% to 15% to a single NBFC. The only exception is for those Non-banking finance companies that involve itself in infrastructural financing. This is going to enhance the funds’ availability for companies like Bajaj Finance, Housing Development Finance Corporation.

The Reserve bank of India has also specified that the banks can go on lending to the NBFCs equal to the value of the government bonds they own for the liquidity coverage ratio.

“The single borrower exposure limit for NBFCs which do not finance infrastructure stands increased from 10 percent to 15 percent of capital funds, up to December 31, 2018,” RBI said in a statement. Chamria welcomed this move but said single client exposure limit may need to be phased back to 10 percent gradually in 2019. “RBI may need to clarify whether the higher single client exposure up to 15 percent taken till December 31, 2018, could be extended thereafter,” he said.

Pros

The NBFCs which have endured the financial turmoil in the recent past are welcoming this step. This will be proved as a boost for the business and the ultimate beneficiaries are going to be the retail borrowers through this move.

Cons

The move is allowing this extension of the exposure of funds to NBFCs until the end of this year only. Apart from that, the beneficiary companies are limited. Only a selected number of non-banking finance companies are going to be benefitted from this.

Role of NBFCs in our financial market

Non-banking finance companies have been playing a major role in financial inclusion and overall economic development of the nation. Their contribution in lending to the retail borrowers at par with the banks. It is because they have tapped that section of the market which was left unattended by the top-notch financial agencies.

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