RBI moves to ease liquidity for non-banking finance firms

RBI moves to ease liquidity for non-banking finance firms

News

1. The Reserve Bank of India (RBI) eased the minimum holding period (MHP) norm for the NBFC sector companies to sell or securitise their loans in order to ease the liquidity crunch.

Important facts

2. The NBFC sector is facing liquidity shortage after Infrastructure Leasing & Finance Services, a core investment company, started defaulting on loans
3. The cost of funds has gone up for the non-banking finance firms putting pressure on profitability.
4. The RBI move is in congruence with the government demand for a special window for NBFCs, to provide them liquidity support.
5. Steps taken by RBI

• The MHP requirement has been relaxed to securitise loans with original maturity of above 5 years after retaining them for a period of six months. Earlier, they were supposed to hold it for at least a year.
• However, the RBI mandated that a minimum retention requirement (MRR) for “such securitisation or assignment transactions shall be 20 per cent of the book value of the loans being securitised or 20 per cent of the cash flows from the assets assigned”.
• Also, RBI has increased the interest subsidy on post and pre-shipment export credit to 5% from 3%. Exporters get the subsidy under the ‘Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit’

6. Benefits of ease

• Relaxation in MHP criteria would primarily benefit Housing Finance Companies and NBFCs offering mortgage loans where the loan tenure is typically more than 5 years. A greater proportion of their loan book would now become eligible for securitisation