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Clarification Needed Over NBFCs Term Loan Moratorium from RBI

Deepti Shikha

| Updated: Apr 11, 2020 | Category: Covid-19, NBFC, RBI Notification

NBFCs Term Loan Moratorium

The loan moratorium permits deferment of loan interest servicing and repayment for a period of three months. The Reserve Bank of India (RBI) does not particularly exclude the NBFCs from the moratorium. Several lenders are demanding from the State Bank of India (SBI) to cover non-banking financial companies (NBFCs) under the loan moratorium announced by the regulator as part of the COVID-19 relief package. NBFCs are worried that if the banks do not extend their moratorium, they will face a liquidity crunch. As indicated by the IBA, the privilege of working capital loans does not apply to NBFCs.

Non-banking financial companies (NBFCs), which are functioning as microfinance institutions (NBFC-MFIs) has asked for clarification from the Reserve Bank of India (RBI) on whether they are eligible for a three-month moratorium on loan repayments as announced by the central bank on March 27, 2020.

What is the Confusion among Borrowers with Regard to NBFCs Term Loan Moratorium?

There has been a lot of confusion amongst the borrowers of Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) regarding their eligibility criteria for the moratorium. However, the Reserve Bank of India has addressed all the NBFCs, Housing Finance Companies, and All India Financial Institutions, along with the banks in its communication on the moratorium. All borrowers, whether they have taken a loan from NBFCs, banks, HFCs, or any other institutions, can opt for moratorium benefit.

The only difference comes between term loans and working capital loans.

Term loans– Loans taken from the bank at a fixed or sometimes at a floating interest rate are termed as term loans. These are short term loans offered to businesses for capital expenditure and also for expansion.

Working Capital Loans: Working capital loans can be termed as short term advances.

The lending entities cannot compel the lenders to pay the accrued interest on term loans during the moratorium period. However, in the case of a working capital loan, the deferred interest will be recovered immediately after the moratorium period.

NBFCs generally borrow from banks and then lend it to varied sectors such as automobiles, retail, and small enterprises. The non-banks are facing a liquidity shortage since ILFS defaulted its payment obligations

SBI on NBFCs Term Loan Moratorium

The State Bank of India (SBI) will not offer any term loan moratorium to NBFCs; instead, it will provide funding under the targeted long-term repo operations (TLTRO), which was recently introduced by RBI. According to TLTRO, banks can invest in commercial papers, corporate bonds, and non-convertible bonds sold by companies, including the NBFCs.

However, other banks have not yet made clear whether they will follow the footsteps of SBI or the rules framed by the industry body Indian Banks’ Association (IBA). As per the IBA after the term loan moratorium is available to all the borrowers, including NBFCs. Only the dispensation on working capital loans does not apply to NBFCs. Meaning, working capital loans that are extended by NBFCs will not be eligible for the moratorium.

However, the rules prescribed by RBI rules permit banks the flexibility to offer dispensation to their borrowers, which means that it is up to the banks to decide on a moratorium of working capital loans.

What should a customer be Aware of or the loans extended by an NBFC-MFI?

The customer must keep the following things in mind:

  • The NBFC-MFI must be fair and transparent in its transactions with the borrower, as mentioned in the guidelines under the Fair Practices Code.
  •  No security deposit or margin or collateral must be kept by the borrower with the NBFC-MFI, concerning loans as per the Qualifying Assets .
  • The borrower must ensure that he receives a loan card from the NBFC-MFI reflecting:
  • The charged rate of interest.
  • The attached terms and conditions on loan.
  • The information will help in identifying the borrower.
  • The acknowledgment received by the NBFC-MFI for all the repayments made, including the installments received and also the final discharge.
  • The loan must classify as Qualifying Asset.
  • All entries done in the Loan Card must be in vernacular language.
  • Interest is charged on reducing balance basis.
  • NBFC does not charge a penalty on delayed payment.

Raters flag caution on Grant of NBFCs Term Loan Moratorium

In a report, the rating agency CRISIL said that non-availability NBFCs on term loan moratorium would be a state of pressure for NBFCs. The liquidity cover, which is available with Crisil-rated NBFCs, will decrease if they are not able to avail the benefit of the bank borrowings moratorium.

Customers are getting moratorium from NBFCs, but NBFCs are not getting this benefit from the banks. This is putting severe pressure on the liquidity profiles of many NBFCs. As stated by a rater, in case the collections do not pick up by June 2020, the liquidity pressure will increase for almost a quarter. The NBFCs will have around Rs. 1.75 lakh crore of debt obligations, which will mature by that period.

With minimum for NBFCs on the term loan and the NBFCs term loan moratorium available only for their borrowers, raising of fresh funds is a critical issue. NBFCs, like banks, do not have access to systematic sources of liquidity and also depend entirely on wholesale funding. Lately, NBFC-MFIs had also written to the RBI seeking clarification regarding EMI moratorium.

The NBFCs generally lend small loans to low-income groups, which also includes daily-wage earners whose incomes will likely get affected during the lockdown period.

The RBI has also given a liquidity window for the corporates through the targeted long-term repo operations (TLTRO) route. Banks can likewise invest resources into the commercial papers and non-convertible debentures. In any case, low-appraised/rated organizations do not make much profit. The RBI declared that it received Rs 1.13 lakh crore worth of bids in the TLTRO, which was conducted for an amount of Rs 25,000 crore with a three-year tenor. The central bank said that liquidity profited under TLTRO by banks must be conveyed in investment-grade corporate bonds, commercial paper, and non-convertible debentures far beyond the extraordinary degree of their investments in these securities as on March 27, 2020.

Conclusion

The NBFCs experts said that NBFCs had been deprived of loans, creating an alarm amongst the companies. As per NBFCs, the small and mid-sized firms rely on loans from these banks. These companies cannot deny moratorium because most of their customers belong to that part of the society, which will be worst affected by the lockdown. Banks might provide new loans to only a few high-rated NBFCs. Hence the RBI needs to pay heed to the NBFCs term loan moratorium issue and make a clarification regarding the same.

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Deepti Shikha

Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. She has enough experience in handling legal affairs of the company. In the initial days of her career, she has worked as a legal researcher and has 3+ years of experience.

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