India's central bank concerned to avert contagion from NBFC liquidity issues: sources

MUMBAI/NEW DELHI: The Reserve Bank of India (RBI) is concerned about liquidity issues facing some Indian non-banking finance companies (NBFCs) such as mortgage or auto lenders and wants to ensure the problems do not become a systemic issue, two sources told Reuters on Wednesday.

After its central board met on Tuesday, the RBI said it had decided to form a separate supervisory and regulatory cadre in the bank after reviewing the institution's current supervisory structure.

The central bank is hoping to use banks to support NBFCs and it will look at options to strengthen risk management systems at these companies, said the sources, who asked not to be named as they are not authorized to discuss the matter with media.

The RBI's board discussed various means to tackle the  liquidity problems in the NBFC sector and it has decided to handle it in a "nuanced" manner by improving liquidity and tightening regulatory norms without sending a "panic" signal to the market, said a senior official, directly aware of the discussions.

Another source said the board was concerned about the liquidity situation, but felt it was not right to call it a "systemic issue".

"There is no liquidity crisis. There are select NBFCs whose balance sheets are under strain and the entities, or banks who were lending are not lending to them anymore or are lending at much higher rates," the second source said. "It's not across the entire spectrum of NBFCs."

The RBI did not immediately respond to requests for comment.

The discussion comes even as Dewan Housing Finance (DHFL)  - an NBFC that is one of India's largest home loan lenders - said it has stopped taking new deposits and blocked premature withdrawals after a credit rating downgrade, dragging down its shares and those of other NBFCs on Tuesday.

EASING LIQUIDITY

The RBI officials and board members are worried defaults by some of the NBFCs could hurt the economy and financial markets, but RBI Governor Shaktikanta Das made it clear the RBI cannot directly provide any help to the sector, both sources said.

The RBI could instead announce a raft of measures including another round of forex swaps soon to inject liquidity into the market, as part of "nuanced" attempts to handle the issue.

Earlier in May, three sources had told Reuters that the RBI would likely conduct another forex swap after the general election, along with further quantitative easing measures to boost liquidity and lower borrowing costs that remain stubbornly high despite the RBI's recent policy rate cuts.

The board members also suggested tightening provisioning norms for the banks, said the first official.

"We have to adopt every possible way to prevent this from becoming a systematic risk to the economy," the official said, adding defaults by some NBFCs could have "serious implications" for the consumer market as well.

Once a new government takes charge, the RBI will meet the new finance minister to hold further discussions on this and other related issues, the official said.

The results of the election, which was staggered over several weeks of voting, are expected on Thursday. Exit polls predicted Prime Minister Narendra Modi is headed toward securing a second term in office, although such polls have  proved misleading before.

The RBI is also holding consultations with the banks and NBFCs to find solutions to deal with the liquidity crunch, the official said.

Among other measures, the RBI in October allowed banks to allocate up to 15 percent of their lending to NBFCs that do not finance infrastructure projects, up from an earlier limit of 10 percent.

The collapse of the Infrastructure Leasing and Financial Services (IL&FS) last year triggered a series a defaults across the shadow banking sector, as borrowing costs for the sector surged.