MFIN may pool securities to access funds for small MFIs under TLTRO 2.0

Credit enhancement would entail guarantee from bigger institutions in case of defaults up to a certain percentage

Small- and medium-sized microfinance institutions (MFIs) are planning to pool securities, with enhancement facility from external institutions, to avail credit from financial institutions under the targeted long-term repo operations (TLTRO 2.0).
 

Last week, the Reserve Bank of India (RBI) announced a TLTRO of Rs 50,000 crore to provide liquidity support to the shadow banking sector and MFIs. According to the RBI, the funds availed under TLTRO shall be deployed in investment-grade instruments.
 

However, a majority of small MFIs don’t have investment-grade rating. “We are thinking of pooling bonds of small and mid-sized MFIs, with some sort of credit enhancement facility, for accessing credit,” said Manoj Nambiar, chairperson, Microfinance Institutions Network (MFIN).
 

Credit enhancement would entail guarantees from bigger institutions in case of defaults up to a certain percentage.

To incentivise financial institutions to lend under the facility, RBI on Tuesday also provided priority sector relief to banks investing in papers issued by small and medium-sized NBFCs and MFIs under TLTRO 2.0. These investments would now not be part of a bank’s adjusted non-food bank credit, while calculating the priority sector commitment.
 

Additionally, RBI extended the deadline for banks to invest the funds by 15 working days from the auction. However, if banks fail to invest the funds within 45 days, they will be liable to pay a penal interest rate of 200 basis points a day, over and above the repo rate.

The RBI had mandated that at least 50 per cent of the funds banks availed under TLTRO 2.0 should go to small and mid-sized NBFCs and MFIs. Of the 50 per cent, 10 per cent has to be deployed in securities or instruments issued by MFIs, 15 per cent in securities/instruments of NBFCs with asset size of Rs 500 crore or less, and remaining in NBFCs with asset size between Rs 500 crore and Rs 5,000 crore, the RBI said in its circular.

Thus, for MFIs, the earmarked amount is Rs 2,500 crore, which is expected to flow to relatively bigger or mid-sized MFIs with asset under management up to Rs 500 crore. Smaller MFIs, with AUM less than Rs 100 crore are likely to be left out.

“Pooling is the only hope for us. SIDBI (Small Industries Development Bank of India) has also stipulated that liquidity support will be only for ‘BBB-’ rated securities. More than 70 per cent of small MFIs will not be covered under this. We are trying to approach SIDBI to ask if they can consider MFI grading, instead of rating, to extend this credit facility to small MFIs,” said Gyan Mohan, director and chief executive officer of Adi Chitragupta Finance, an MFI based out of Patna, with a loan outstanding of Rs 80 crore.
 

Grading is an ordinal measure of scalability, sustainability and reliability of the MFI’s internal processes, controls and governance structure. However, it does not comment on the debt repayment capacity and is not a credit rating.