‘Special Window For NBFCs Under Insolvency Law In The Offing’

The government may set up a special window to address the issues faced by stressed non-banking financial companies (NBFCs) under the insolvency law, at a time when Dewan Housing Finance and Punjab and Maharashtra Co-operative Bank have joined the league of troubled entities, adding to the woes of the already stressed sector.

Currently, the resolution of stressed financial institutions cannot be taken up under the Insolvency and Bankruptcy Code (IBC). According to a government official, the government is likely to notify Section 227 of the IBC that would allow the inclusion of financial service providers under this law.

***

Banks With Exposure To Poorly-Run NBFCs May Have To Take Larger Haircuts: RBI Governor

September 20, 2019: Financial institutions that have wide exposure to non-banking financial companies (NBFCs) which are found wanting on the corporate governance front will have to take more haircuts, Reserve Bank governor Shaktikanta Das said on September 19, 2019.

The RBI governor’s observation comes at a time when banks are grappling with the resolution of stressed cases, including the over Rs 50,000-crore default by mortgage financier DHFL.

"(In resolving the crisis at those) NBFCs, which have major governance issues, banks need to take a larger haircut. These are business failures, but there is also an element of administrative or governance lapses in them,” Das said, adding that banks will have to take a balanced call while dealing with the issues of stressed loans.

NBFCs depend on short-term borrowing to finance long-term assets like home loans, which has led to the troubles in the sector.

Das, however, made it clear that the RBI would not take control of an NBFC to find solutions. Recent chances in the law give the banking regulator the power to do so. Das said the RBI would be using the powers of the amended statutes only if any need arises while it continues to monitor the 50 largest NBFCs.

The RBI would rather go for market-based solutions, which could involve promoters cutting stake, new promoters coming in or securitisation of the assets to raise resources to come out of liquidity issues.

Signs of ill health became visible in the sector when infra-focused major IL&FS started defaulting on its loans.

With inputs from Housing.com News