Steps soon to ease liquidity crunch: Rajiv Kumar, Financial Services Secretary

liquidity crunch, Rajiv Kumar, Financial Services Secretary, NBFC, Arun Jaitley, IL&FS, National Housing Bank, CRAR

Separately, finance minister Arun Jaitley met senior bankers on Friday and reviewed the liquidity situation, which has worsened in recent months, especially after the crisis at IL&FS. (IE)

Financial services secretary Rajiv Kumar said on Friday that some steps are being planned to ease the liquidity crunch being faced by non-banking finance companies (NBFCs), adding that the government is sensitive to both liquidity and asset-quality concerns. “Very soon you will be hearing. Something is being worked out,” he said on the sidelines of an event organised by SIDBI.

Separately, finance minister Arun Jaitley met senior bankers on Friday and reviewed the liquidity situation, which has worsened in recent months, especially after the crisis at IL&FS. Speaking on the central bank’s prompt corrective action (PCA), Kumar said the finance ministry has favoured aligning the PCA framework — aimed at nursing stressed banks to health by imposing some tough conditions on them — with the best practices globally, instead of maintaining a more stringent architecture.

He also added that the finance ministry will launch the next round of recapitalisation of PSBs after they announce their September quarter results. As for efforts to ease a liquidity crunch being faced by NBFCs, the RBI last week raised the ceiling for lending to a single NBFC until end-December, which is expected to facilitate additional lending of Rs 59,000 crore to NBFCs. Before that, National Housing Bank (NHB) this month hiked the refinance limit for housing finance companies (HFCs) by 25% to Rs 30,000 crore for the year through June 2019 from the initial target of Rs 24,000 crore. Even State Bank of India (SBI) said it will triple its target of buying standard loans from NBFCs to up to Rs 45,000 crore in the current fiscal. Still, sentiments have remained subdued.

Apart from senior public-sector bankers, the Parliamentary standing committee on finance has also, in a recent report, suggested that the Reserve Bank of India (RBI) ease the capital-adequacy norms, at least for nine of the 11 stressed state-run banks that are under the PCA and don’t have international operations. For its part, the RBI has been reluctant to change or relax its PCA norms.

The central bank has mandated that banks maintain capital-to-risky asset ratio (CRAR), including capital-conservation buffer, at 11.5%— 1 percentage point higher than Basel norms. Similarly, the common equity tier (CET)-1 of banks is required to be at least 5.5% of its risk-weighted assets — again 1 percentage point higher than the global norms. “Such stringent norms stipulated by the RBI for our banks… who are not internationally active at all, is unrealistic and unwarranted,” the House committee has said.

Arguing against any relief on the PCA front, RBI deputy governor Viral Acharya recently said that without the imposition of the PCA, some banks would have incurred higher losses and required even greater recapitalisation from taxpayer money. The 11 PCA banks make up for 30% of deposits and 29% of advances of all the 21 PSBs. When asked if the government has sought relaxation of the PCA framework of RBI, the financial services secretary said, “…what is being talked about is that it (our regulations) be aligned to best practices, which exist elsewhere in the world. Take it from the best, align to it, and don’t keep it higher than that”. He, however, added that there is no demand for easing the PCA norms (from the best standards adopted globally).

PCA framework puts curbs on financially weak with the objective to halt the deterioration and reverse the trend. These stressed banks face restrictions on distributing dividends and remitting profits when they are put under such a framework. Also, they are stopped from expanding their branch networks and they need to maintain higher provisions.

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