INSUBCONTINENT EXCLUSIVE:
sought on Friday to ease a massive credit crunch affecting non-banking finance companies (NBFCs) by allowing banks to act as partial
guarantors for some of their existing debt which should make it easier to refinance.The RBI said banks could now provide partial credit
enhancement to refinance bonds issued by NBFCs and housing finance companies (HFCs) with tenors of not less than three years
Until now, banks were not allowed to provide credit enhancement to NBFCs.Panic over potential debt defaults in the shadow banking sector
have caused corporate bond yields of NBFCs to rise by more than 80 basis points since September
The resulting liquidity crunch has added to a rift between the central bank and the government."The RBI wants the NBFCs to raise long-term
debt and that is why they have laid down the three-year restriction," said a debt investment banker who has invested in some of the
financing companies."Mutual funds and insurance companies who have funds but don't have credit risk appetite will now rely on credit
enhancement provided by banks and buy these bonds."The Ministry of Finance reportedly said in a letter to the Ministry of Corporate Affairs
that it feared significant default from large financing companies in the next six weeks if no liquidity support was provided to these
firms.According to bankers, Rs 1.04 lakh crore ($14.41 billion) of debt is set to mature in November and another Rs 62,340 crore in December
for papers issued by the NBFC and HFCs.The RBI said banks can provide a credit enhancement of up to 20 per cent of the bonds to be issued
and limited such enhancements to one percent of a bank's capital funds.The central bank also directed banks to ensure the funds were only
used to refinance the existing debt indicating that the bond proceeds from such credit enhancements should not be used for NBFCs' growth or
lending operations.Meanwhile one top central bank official, in a speech on credit risk and bank capital regulation, defended the RBI's
stringent capital norms for banks given that the probability of companies defaulting, known as cumulare default rates are higher in India
than global standards."The real strength will come from recognising weaknesses in the balance sheet and making provisions for them rather
than pretending to believe that the balance sheet is strong," RBI Deputy Governor NS Vishwanathan said in a speech on October 29 that was
uploaded on the website on Friday.Mr Vishwanathan's comments come on the back of the government's pressure on the RBI to ease lending
restrictions on 11 state-run banks
The RBI has barred these banks from lending under the so-called prompt corrective action plan until they improve their capital ratios,
reduce bad debt and become profitable.The lending restrictions have been another key bone of contention between the RBI and the government
and this rift widened after another deputy governor Viral Acharya in a speech on October 26 had said that undermining central bank
independence could be "potentially catastrophic".There has been a war of words between the RBI and the government since Mr Acharya's
