RBIs Revised Circular No Breather For NBFCs

Non-banking finance companies (NBFCs) are not entirely enthused by the RBI’s revised stressed assets circular, contending that it does not give any additional advantage or benefit to such companies.

Speaking to BusinessLine, Raman Aggarwal, Chairman, Finance Industry Development Council (FIDC), said the latest RBI circular covers NBFCs, but it does not give any additional benefit to these companies. The RBI’s erstwhile February 12 circular issued last year had covered only banks. Under the revised framework, even if a borrower pays to an NBFC but has defaulted with a bank/small finance bank, the NBFC gets roped in in signing the Inter Creditor Agreement and becomes part of the resolution plan, he said.

“Further, in such cases, the NBFC’s role shall be highly subdued, since its share in the overall value would be below 75 per cent. So, we may end up in a situation where the NBFC may be forced to follow the resolution plan, failing which additional provisioning may be required. As such, this does not add value to the entire recovery process of NBFCs,” said Aggarwal. It may be recalled that the revised framework provides that signing of inter-creditor agreement (ICA) by all lenders is mandatory, which will provide for a majority decision criteria.

The ICA would provide the decision agreed upon by lenders representing 75 per cent of the value of total outstanding credit facilities and 60 per cent of lenders in number.

This is a new requirement where the decision-making is not only linked to the quantum of loan extended by the lenders but also the number of lenders, according to a PwC research note on the revised RBI circular. Meanwhile, FIDC has given its feedback on the RBI’s recent draft guidelines on ‘Liquidity Risk Management for NBFCs and Core Investment Companies’. FIDC has, among other things, suggested that the guidelines be made concomitant with the provision of a mechanism of liquidity support for NBFCs.

“Currently, tight liquidity conditions in the industry have made generation of funds a very difficult task, and we request the RBI to kindly consider putting in place a suitable mechanism for such liquidity support,” said Aggarwal in a letter detailing the feedback to the RBI’s draft guidelines.

Alternatively, the implementation of these guidelines may kindly be deferred until return of normal liquidity conditions for the sector, he added.