RBI's liquidity support to NBFCs negligible: Emkay Global Research

The Reserve Bank of India (RBI) has provided liquidity support worth Rs 50,000 crore to shadow bank lenders through long term repo operations 2.0 (TLTRO 2.0), but sector needs nearly Rs 2 trillion assuming average maturity of five years, according to Emkay Global Research.

The RBI has so far not provided any clarity on whether banks will grant moratorium to the shadow lenders on the loans they have availed. However, as the banks could not reach a consensus on the issue in the meeting held by Indian Banks Association (IBA), it is expected that banks will individually take a call on granting a moratorium to NBFCs.

“With banks continuing to abstain from providing the necessary liquidity to NBFCs (especially mid/small NBFCs), the RBI would require to infuse further liquidity at regular intervals in order to avoid any systemic issues (similar to post ILFS crisis) for NBFCs as well as for the entire financial system”, the report by Emkay Global Research said.

“..the liquidity available through the LTRO window is negligible compared to the actual liquidity crunch in the system”, the report said.

The total credit outstanding from banks to NBFCs stands at Rs 7.3 trillion, which is about 8.3 per cent of overall bank credit and 25 per cent of total NBFC borrowings (Rs30.3 trillion) as on December 2019.

The RBI has also 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. So, all lenders (including NBFCs) to create contingent provisions of 10 per cent on all stressed accounts, which are under the standstill, spread over two quarters, i.e., March 2020 and June 2020. These provisions can be adjusted against the actual slippages.

“Based on our base assumption and calculations, HDFC and Bajaj Finance are better placed with merely 9-10 per cent of FY21E profit before tax being affected due to additional provisioning, whereas most of the vehicle financiers would be under stress due to weaker customer profile and elevated Stage 1 additions. Mahindra & Mahindra Finance is the worst placed with additional provisions forming around 57 per cent of FY21E PBT”, said report by Emkay Global report.