News Regulations08 Nov 2018

India:Regulators discuss liquidity issue in non-bank financial sector

08 Nov 2018

India's finance ministry officials are looking into issues related to the liquidity crunch in the financial sector, and held a meeting last week with the country's financial regulators on the subject, reports Reuters.

The meeting of the Financial Stability and Development Council was attended by regulators including IRDAI, the Reserve Bank of India, Securities and Exchange Board of India and Pension Fund Regulatory and Development Authority (PFRDA).

The session was held to discuss the ongoing funding issues faced by non-banking finance companies (NBFC) after a series of debt defaults by one of the country’s largest infrastructure funding companies, Infrastructure Leasing and Financial Service Ltd (IL&FS), in September triggered a heavy sell-off with lenders shunning the entire shadow banking sector.

“The government has raised the issue of liquidity problems in the NBFC sector with the RBI,” a senior finance ministry official who was present at the meeting told reporters.

The crisis at IL&FS, that has 348 subsidiaries and INR910bn ($12.37bn) outstanding debt, has forced the government to take over the company's board and appoint a new one.

Pension funds

One consequence of IL&FS's default is that the PFRDA said it would tighten investment norms for pension fund managers (PFMs), reports Financial Express.

According to current PFRDA investment guidelines, PFMs can invest only in corporate bonds which are rated at least ‘AA’ by rating agencies.

Among other steps, the pension regulator may prescribe guidelines to make it mandatory for PFMs to do their own due diligence on such investments and not rely solely on views of ratings agencies, which have often proved wrong. The latest example was IL&FS, whose bonds were rated ‘AAA’, indicating the highest level of creditworthiness.

Domestic capital markets were roiled since the last week of September after IL&FS revealed a series of delays and defaults on its debt obligations. The IL&FS contagion spread to other NBFCs and housing finance companies, resulting in tightening of liquidity in the sector and a sell-off of securities of many of these institutions.

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