NBFCs Current Affairs - 2019
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RBI relaxes rules for NBFCs to sell or securitise their loan books to ease persistent stress in sector
Reserve Bank of India (RBI) relaxed rules for non-banking financial companies (NBFCs) to sell or securitise their loan books in bid to ease persistent stress in the sector. RBI has relaxed minimum holding period (MHP) requirement for originating NBFCs, in respect of loans of original maturity above 5 years, to receipt of repayment of six monthly installments or two quarterly instalments. Earlier, they had to hold these assets for at least one year. However, relaxation on MHP will be allowed when NBFC retains 20% of book value of these loans. RBI also has prescribed certain Minimum Retention Requirement (MRR) for NBFCs for availing the relaxed norms. The relaxed dispensation will apply to securitisation/ assignment transactions carried out during six months.
NBFCs loosely known as shadow banks, are facing stress on their balance sheets after debt crisis hit large infrastructure funding company in September, triggering panic amongst investors and cash crunch in the sector. Following massive volatility in financial markets, RBI and government have taken steps to ringfence crisis and support financing needs of sector, including providing additional liquidity to banks and credit enhancement for refinancing needs.
Union Government is going to launch Rs.500 crore Credit Enhancement Fund (CEF) in July 2018 to facilitate infrastructure investments by insurance and pension funds.
The CEF provides additional source of assaurance or gaurantee that borrower will service their loan. It also helps borrower to raise loans at lower interest rates. The fund was first announced in Union Budget for fiscal year 2016-17.
Credit Enhancement Fund (CEF)
CEF will provide credit enhancement for infrastructure projects which will help in upgrading credit ratings of bonds issued by infrastructure companies and facilitate investment from investors like pension and insurance funds.
The initial corpus of the fund will be Rs 500 crore and will be sponsored by IIFCL (India Infrastructure Finance Company). It will operate as a non-banking finance company (NBFC). IIFCL will hold 22.5% stake in the NBFC, while Asian Infrastructure Investment Bank (AIIB) has been offered by the Government to pick up 10% stake.
At present, only $110 billion is being invested in infrastructure in India, against requirement of $200 billion, leading many analysts to classify India as infrastructure deficit country. Most of the present infrastructure project financing is done by banking system. But all these lenders are saddled with problem of non-performing assets (NPAs). So there is need for the private sector to be more active on the infrastructure investment front. CEF will serve as alternative for rising of money for infrastructure projects through corporate bonds.