RBI eases liquidity squeeze for NBFCs, small businesses; relaxes ECB hedging guidelines
Move to make more bank capital available for small businesses, help address NBFC refinancing needs, prop up the rupee
Amid persisting concerns in the government over a liquidity squeeze in the non-bank lenders (NBFC) segment and its adverse effect on the financing of small businesses, the Reserve Bank of India on Monday announced further easing of the hedging norms for external commercial borrowings (ECBs).
According to a circular issued by the central bank, for ECBs of maturity period between three-five years, the mandatory hedging requirement will now be 70%, instead of 100%. Also, for such ECBs already raised, the existing hedges would be required to be rolled over only to the extent of 70% of the outstanding amount.
The move could let Corporate India, especially the larger companies and banks, raise foreign debt under more competitive terms, in turn making available more domestic bank capital for small and medium businesses and enabling stronger banks to address the refinancing needs of NBFCs. The RBI’s decision would serve to reduce the hedging cost of companies. Higher ECB inflows could also lead to further strengthening of the rupee (the domestic currency had gained as much as 220 paise in the seven trading sessions before a marginal fall on Monday).
On November 6, the RBI had reduced the minimum average maturity requirement for ECBs in the infrastructure space to three years from five years earlier. Additionally, the average maturity requirement for mandatory hedging was reduced to five years from 10 years.
Although the RBI had maintained there wasn’t any serious liquidity problem in the NBFC space, thanks to prodding by the government, it has lately taken many steps to ease the credit flow to the segment.
It announced partial credit enhancement, change in concentration limits etc. in order to allow banks to invest more in NBFCs. But the government reckons that the NBFCs would need to be able to raise more funds for their continued growth and being able to boost consumption demand. Economic affairs secretary Subhash Chandra Garg told FE recently: “The traditional ways NBFCs were financing themselves have to change. The commercial papers route has got reduced substantially… Our sense is still that we need to do something more for some more time (to improve NBFC liquidity).”
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