In no mood to step back in the tussle with the Reserve Bank of India, the Finance Ministry feels that the central bank needs to do more, immediately, to give relief to the financial sector.

North Block feels the RBI’s move to create a special window for non-banking finance companies (NBFCs) and housing finance companies (HFCs) to raise money by issuing bonds will not have the desired result. It, however, acknowledges that changes in the ECB (external commercial borrowing) norms will be of some help.

The government nominee on the RBI board will press for resolutions on the pending issues at the November 19 board meeting. Of the nearly dozen issues — more liquidity for NBFCs/HFCs and MSMEs; facility for banks to raise additional capital; prompt corrective action (PCA); higher capital norms for banks — the RBI has acted on two. But these are not ‘sufficient’, according to the Finance Ministry.

Two notifications issued

In the last nine days, the RBI has issued two notifications. The notification of November 2 was on allowing “banks to provide partial credit enhancement (PCE) to bonds issued by the systemically important non-deposit taking non-banking finance companies (NBFC-ND-SIs) registered with the RBI and HFCs registered with the National Housing Bank”.

The notification of November 6 has two provisions: Reducing the minimum average maturity for ECBs raised by infrastructure companies to three years from five, and reducing the average maturity requirement from 10 years to five years for exemption from mandatory hedging provision. “Permitting NBFCs and HFCs to raise money through bonds is nothing but an eyewash. When an institution is in distress, why would anyone subscribe to its bond?” said a senior Finance Ministry official, who is associated with the developments.

Support to NBFCs and HFCs demands money immediately to repay maturing debt. As on October 29, these institutions in the private sector have to repay over ₹1.69 lakh crore by December 31. (The figure may change depending on fresh borrowings and repayments.) In November alone, debt of approximately ₹1 lakh crore is maturing.

The official, however, felt that the relaxation in the hedging norm will help infrastructure companies “but not in a big way as the requirement is very high and sources have become limited”.

“The RBI had said that the provisions were reviewed and decisions taken in consultation with the government. The move came amid concerns surrounding the availability of funds following a liquidity squeeze and the difficulties being faced by non-bank lenders, especially those facing asset-liability issues due to heavy reliance on short-term funding for long-term assets. This, along with default by infra lender IL&FS, has hurt the credit market.

Mum on Urjit Patel’s fate

The Finance Ministry official maintained silence on the fate of RBI Governor Urjit Patel. The market is abuzz that Patel might leave much before his tenure ends. He assumed office as the 24th Governor of the RBI on September 4, 2016. He was appointed for three years. Though the official release did not mention it, the convention has been to extend the term for two years.

All eyes are on the November 19 RBI central board meeting. Apart from liquidity and capital for banks, the board is likely to discuss the norms for maintaining surplus reserves, an issue that could be a precursor to transfer of more surplus to the government.

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