August 7, 2019 / 2:09 PM / 11 days ago

RBI moves unlikely to ease pain for India's struggling shadow banks

MUMBAI (Reuters) - India’s central bank outlined two measures on Wednesday aimed at easing liquidity pressures on crisis-hit shadow banks, but industry insiders say the moves, while positive, are unlikely to lead to any substantive improvements in the troubled sector.

A security guard's reflection is seen next to the logo of the Reserve Bank Of India (RBI) at the RBI headquarters in Mumbai, India, June 6, 2019. REUTERS/Francis Mascarenhas/File Photo

The Reserve Bank of India, which also cut its benchmark policy rate by 35 basis points on Wednesday, said it would allow banks to increase their exposure to a single non-banking finance company (NBFC). The move was aimed at boosting credit to cash-strapped NBFCs, or shadow banks.

The RBI also allowed banks to classify loans to NBFCs for key areas such as agriculture, housing and small and medium businesses - up to certain limits - as priority sector lending, in a bid to keep credit flowing to the parts of the economy where most Indians work.

NBFC’s have been battling a credit crunch since IL&FS, or Infrastructure Leasing & Financial Services, collapsed in late 2018 amid fraud allegations. The fall of IL&FS, a behemoth in the space, pushed up borrowing costs for rivals and has sharply impacted consumer spending and stung sectors such as real estate and autos that are big drivers of consumer demand.

Senior executives from at least three NBFCs, however, said the moves announced by the RBI on Wednesday, coupled with other recent changes, were unlikely to ease the pressure substantially.

“Banks and financial institutions have become so risk-averse that they just aren’t keen on increasing their exposure to NBFCs right now, so even though the measures are positive the scenario is unlikely to change until the economic environment improves,” said the finance head of one NBFC, who asked not to be named as he was not authorized to discuss the matter with the media.

INCREMENTAL STEPS

Wednesday’s moves were the latest in a series of measures rolled out by the government and the RBI over the last few months to ease liquidity for NBFCs, but so far the initiatives have not yielded significant benefits.

“Today’s steps are marginally better from the ones taken earlier, but even these seem to be merely incremental in nature considering the current market,” said the head of another small NBFC, who also asked not to be named.

Even though the RBI has been focussed primarily on improving liquidity, RBI Governor Shaktikanta Das said on Wednesday that the regulator was also keen to ensure that there were no collapses of any large, systemically important NBFCs.

Dewan Housing Finance Corp Ltd, one of the largest housing finance companies in India, which owes nearly 1 trillion rupees (11.5 billion pounds) to its creditors, is currently scrambling to get its lenders to sign-off on a restructuring plan that will place a moratorium on repayments, even as it seeks funds from banks to start retail lending.

At a press briefing after the RBI policy meeting, Das acknowledged that any benefit from the new directives was contingent on banks’ willingness to increase their lending to the shadow sector.

“It’s for banks to make their own risk assessment and take the call,” he said.

Analysts said the tweak in the priority sector lending rules may work in favour of smaller, retail-focused NBFCs that have lately struggled to raise funding, but may not help bigger shadow banks that have been the hardest hit.

“Larger corporate-focused shadow banks that are struggling more will see only incremental benefits,” said A.M. Karthik, financial sector head at rating agency ICRA.

Reporting by Nupur Anand and Swati Bhat in Mumbai; Editing by Euan Rocha and Alex Richardson

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