The industry neither wants the RBI to enforce curbs on borrowing maturity profiles, nor regulate asset-liability management.
Last month, the RBI relaxed IDF norms by allowing them access to funds through the issue of rupee or dollar-denominated bonds of a minimum five-year maturity. While IDF-NBFCs can now raise funds through the loan route under external commercial borrowings (ECBs) with a requirement for a minimum tenor of five years, these loans cannot be sourced from foreign branches of Indian banks, fund managers are not enthused.
The industry wants RBI to not impose controls on IDF maturity or regulate asset and liability management (ALM) for them. Currently, IDFs are limited to raising only 10% of their borrowing as short-term funds. This is in contrast to housing finance companies, which do long-term financing and resort to borrowing one-year commercial papers to finance 20-year loans.
IDFs borrow a minimum five-year money and lend to projects, that have longer maturity periods. But, there are instances when promoters prepay. Since banks have prepayment options anytime, IDFs have to give prepayment options, which leads to borrowing profile mismatch. They borrow shorter tenor bonds and commercial papers up to 10% of their total outstanding borrowings.
“IDFs need the flexibility to borrow short-term as a large part of their loans have an option of prepayment with the borrowers, while they have to borrow for five years, leading to an asset-liability mismatch,” said Paritosh Kashyap, president and head of the wholesale banking group at Kotak Mahindra Bank. “This flexibility will facilitate the growth of IDFs and give them the ability to manage their liabilities based on the maturity profile of the assets.”
Interest rates have risen 250 basis points since May 2022. When the interest rate goes down, the deployment will be at a lower rate while borrowing is fixed at a higher cost. Because of the lack of ability to borrow short-term maturity under IDF, that model starts to falter. “The fear is as interest rates decrease, funds will have to be deployed at lower rates, while borrowing will be locked at higher costs,” said a senior banker. “Due to IDFs’ inability to access short-term borrowing options, the model falters.”In addition to fundraise through the ECB route, RBI has defined single borrower exposure limits for IDF-NBFCs at 30% of tier-1 capital, while the cap is set at 50% for a single group or borrower party.
While regulations around lending only to operational infrastructure projects with completed one year of commercial operations have helped IDFs maintain strong asset quality, the industry believes it will help them when regulatory restrictions on short term borrowings are lifted.
