RBI promises liquidity support to NBFCs, MFIs dealing with cashflow issues

RBI has put the ball in banks' court on the moratorium issue

The Reserve Bank of India (RBI) on Friday said it will conduct targeted long-term repo operations 2.0 (TLTRO 2.0) to provide the much-needed liquidity support to the shadow banking sector that has been hit hard in the ongoing health crisis and the subsequent nationwide lockdown.

However, the RBI did not provide any clarity on the issue of moratorium to non-banking financial companies (NBFCs) and microfinance institutions (MFIs) on the loans they have taken from banks, thereby putting the ball in banks’ court to decide on the issue.

Shadow lenders are facing a situation where they have to repay banks at a time when their customers are not paying them back in light of the moratorium, leading to severe cash flow problems.

RBI Governor Shaktikanta Das, in his address to the media, said the LTRO for “NBFCs, MFIs will be for an aggregate amount of Rs 50,000 crore, to begin with, in tranches of appropriate sizes.”  Under TLTRO 2.0, banks will borrow from the RBI at the benchmark policy rate of 4.4 per cent.

The central bank said the earlier LTRO funds has largely been to bonds issued by public sector entities and large companies, especially in primary issues, while the mid-sized firms, including NBFCs and MFIs, are struggling with cash flow problems.

“The funds availed of by banks under TLTRO 2.0 should be invested in investment-grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount going to small and mid-sized NBFCs and MFIs,” the RBI said.

 

 

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 below, and the remaining 25 per cent in NBFCs with asset size between Rs 500 crore and Rs 5,000 crore, the RBI said in its circular. These investments have to be made within one month of availing of the liquidity from the RBI. The first auction under TLTRO 2.0 will be conducted on April 23.

Umesh Revankar, managing director and chief executive officer (MD & CEO), Shriram Transport Finance, said, “We feel that the RBI would like banks to address the issue of moratorium rather than giving directions to them. The NBFC industry wants moratorium on bank loans. I don’t think there is an issue with liquidity here but moratorium helps because it will help to manage liquidity better.”

Deo Shankar Tripathi, MD & CEO, Aadhar Housing Finance, said: “The TLTRO 2.0 will ease the liquidity problem of NBFCs, MFIs to some extent even if their lender banks do not provide moratorium on payment of instalment and interest, which NBFCs are extending to their customers. However it is left to the discretion of individual banks to consider moratorium for NBFCs.”

Finance Industry Development Council (FIDC) co-chairman Raman Aggarwal said: "The issue was not touched upon by the RBI and has been left to the discretion of banks. The Indian Banks’ Association is holding a meeting on this issue (on Saturday) and we expect a positive outcome from it.” 

According to Hemant Kanoria, chairman, Srei Infrastructure Finance, though the RBI has attempted to address some of the short-term liquidity issues, it is not sufficient. The urgent need is companies be allowed one-time restructuring based on cash flows.

To further ease liquidity conditions for NBFCs and MFIs, the RBI has provided special refinance facilities of Rs 50,000 crore to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and National Housing Bank (NHB).

Of the total amount, NABARD will get Rs 25,000 crore for refinancing regional rural banks, co-operative banks and MFIs, while Rs 15,000 crore will go to SIDBI. The remaining Rs 10, 000 crore will go to NHB for supporting housing finance companies. Advances under this facility will be charged at the RBI’s policy repo rate, the RBI said.

Krishnan Sitaraman, senior director, CRISIL Ratings, said, the twin funding measures announced by the RBI will definitely provide some relief to NBFCs/HFCs/ MFIs but at the same time the fact that no formal announcement was made on applicability of bank loan moratorium would be a dampener for them.

Moreover, in a much-needed relief to all lenders (including NBFCs, MFIs), the RBI provided a standstill on asset classification for standard accounts that took the three-month moratorium, thereby extending the bad loan classification period to 180 days from 90 days.

Now, asset classification status of loans as of March 1 will exclude the moratorium period from March 1 to May 31. The standstill on NPA classification will give a breather to accounts that might have defaulted on one or two instalments. They can get more funding now.

Among MFIs, small and mid-sized lenders are disappointed. About 80 per cent of the MFIs, which fall in the small and mid-sized category, don’t have investment-grade ratings, and according to the RBI, the funds under TLTRO 2.0 can be deployed in investment-grade instruments. Also, MFIs were expecting on moratorium on loans.

“The demarcation of liquidity for small MFIs is encouraging but smaller ones might not get it as they don’t have investment-grade rating. However, we could explore mosaic structure, where a pool of smaller MFIs come together,” said Rahul Mittra, co-founder & CEO of Margadarshak Financial Services, a mid-sized NBFC-MFI based in Lucknow. However, bigger MFIs are better placed and many banks have already started extending the moratorium.

Rating agency CARE has assigned a negative outlook for NBFCs and HFCs in light of the Covid-19 outbreak. It said the funding challenges for the sector will persist as banks will become more selective in lending to the sector.

On the other hand, mutual funds will shy away from the sector as they are facing huge redemption pressure. Similarly, securitisaiton, which has been one of the major sources of funding for NBFCs-HFCs during the last 18 months, could take a pause as collections remain uncertain during moratorium. Amid these challenges, the liquidity measures taken by the RBI will provide some solace but the sector continues to stare at asset-side challenges which are expected to mount after the moratorium period is over.