RBI offers additional liquidity to banks to deal with NBFC/HFC exposure

Reserve Bank of India (RBI) will provide additional liquidity of Rs1,34,000 crore to banks by frontloading the Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) by an incremental 0.5 per cent each in August and December.

This will offer banks with an increased FALLCR amounting to 1 per cent of the bank’s NDTL, helping them to reckon with the incremental outstanding credit to NBFCs and Housing Finance Companies (HFCs) over and above the amount of credit to NBFCs/HFCs outstanding on their books as on date, says an RBI release. 
RBI said it has been closely monitoring top NBFCs/HFCs, identified on the basis of their size and credit behaviour. Over the past six months, RBI has also infused adequate liquidity in to the system through OMOs, currency swaps, phased increase in FALLCR, etc. 
In fact, RBI said, for more than a month now, there has been a liquidity surplus in the system. 
In the meantime, an internal working group in RBI is reviewing the liquidity management framework and their recommendations are expected towards the middle of July 2019, it added.
Non-banking financial companies (NBFCs) play an important role in sustaining consumption demand as well as capital formation in small and medium industrial segment. It is felt that NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk averse. The government has proposed purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs1,00,000 crore during the current financial year. For this, the government will provide one time six months' partial credit guarantee to public sector banks for first loss of up to 10 per cent.
In order to enable the banks to implement this announcement and deal with the NBFCs/HFCs issue effectively, the Reserve Bank of India will provide required liquidity backstop to the banks against their excess G-sec holdings. A circular in this regard will be issued separately, RBI stated.