Context:
The heads of select NBFCs have put forward several recommendations to the RBI Governor, and senior officials, to enhance their access to funding due to the decline of bank funding to the sector. Discussions included external commercial borrowings (ECBs), liquidity support, debt market deepening, and regulatory changes.
Key Highlights:
Enhancement of External Commercial Borrowing (ECB) Limits
- Proposal
- Increase annual ECB limit under the automatic route to $750 million.
- Rationale
- Enables the NBFCs to mobilize further external funds when domestic sources are limited.
An External Commercial Borrowing (ECB) is a foreign currency loan availed by an Indian company from a non-resident lender. It may be a bank loan, bond, or supplier or buyer credit.
- How does it work?
- Eligible Indian firms can raise ECBs in rupees or in foreign currency.
- The company has to adhere to the norms of the Reserve Bank of India (RBI) and the Department of Economic Affairs (DEA).
- ECBs may be raised by the automatic route or the approval route.
- Under the automatic route, companies are allowed to raise funds without any advance approval if they are conforming to the government’s standards.
- Under the approval route, companies have to obtain government approval for certain industries.
National Liquidity Facility for the NBFCs Multipurpose
- Create an entity, just like an NHB, for smaller NBFCs to provide such a facility.
- Why?
- Because smaller NBFCs carry relatively higher borrowing costs and face challenges of fund availability compared to AAA rated NBFCs.
Reclassification of Gold Loan NBFCs
- Reques
- Should be reclassified to include gold loan NBFCs for regulatory benefits similar to housing finance and microfinance companies.
- Effect
- May reduce regulatory risk weights, thereby enhancing funding availability.
Deepening the Domestic Debt Capital Market
- Doubt
- Lower rated NBFCs cannot raise funds domestically anymore but rely increasingly on overseas bonds for long term funds.
- Proposal
- Boost domestic bond markets to mitigate over dependence on bank loans and external markets.
Deepening the Domestic Debt Capital Market
- The industry needed a specific refinancing institution. The financial charge is dedicated to the microfinance institutions (MFIs) that are in distress conditions. This definitely would help improve the credit flow towards MFIs ensuring healthy stability in microfinance lending.
Background and Regulatory Context
Dwindling Bank Funding for NBFCs
- In November 2023, the RBI increased risk weights on bank loans to non banking financial companies from 100% to 125%. This rendered the costlier for borrowing now.
- Effects
- Bank to NBFC exposure reduced from 43.1% as of March 2023 to 42.7% as of March 2024.
- This moderation in bank lending was viewed as positive for financial stability and has reduced NBFC liquidity.
Unified Lending Interface (ULI) Initiatives by the RBI
- According to Governor Malhotra, NBFCs should join ULI, which is a digital lending framework for financial inclusion.
- The initiative is expected to bolster loan accessibility and transparency in the credit system.
ULI was designed by RBIH and co-designed with the Reserve Bank of India (RBI). ULI is a technological platform designed for easy access to verified data across sources, using standardised APIs to which any lender can attach seamlessly using a ‘plug and play’ s
