NBFC sector is becoming nowadays a very popular and economically very stable, firstly we should...
The Indian economy has been severely affected due to coronavirus outbreak. The worst effect has been on the majority of small businesses in comparison to the big companies as large corporates have sufficient profits, contingency funds and a large customer base to survive without bearing the negative effect of the lockdown.
If we talk about small businesses, they have a shortage of funds to survive as their operational cost is higher than their revenue. Thus, by the time this pandemic come to an end, most of them would be in a situation to forcefully wind up. Non-Banking Finance Companies have also been largely affected due to the coronavirus lockdown in India. Let’s have a look at the Impact of COVID-19 on NBFC.
The NBFC Sector is staring at another bout of liquidity challenges due to the side effects of COVID-19. Earlier, there was no clarity on whether the three-month moratorium applies to the loans which NBFCs have taken from the Banks or not.
NBFCs were to repay the loan amount to the banks when their inflows have been effected due to a three-month moratorium period provided by them to their customers on terms loans as advised by Reserve Bank of India.
It means that initially, there was no moratorium period provided to the NBFC and HFC by the Banks, that are availing credits from them like any other borrower and it has been currently observed that in aggregate, NBFCs have Rs 1.75 trillion of debt obligations maturing by them to the banks.
Moratorium becomes important for NBFCs and HFCs mainly because these lenders, unlike banks, do not have access to systemic sources of liquidity and depend significantly upon wholesale funding.
Bank borrowing is a significant source of funding for the shadow banking sector, especially the smaller ones. Apart from that, they borrow money from the debt capital markets via instruments like NCDs and CPs. Of late, many NBFCs have been acquiring overseas through ECBs, given the liquidity challenges they have been encountering in the domestic market.
As an impact of coronavirus on NBFCs, Non-banking finance companies are on edge with commercial paper worth ₹1.6 lakh crore and non-convertible debentures worth ₹87,000 crores, which they can redeem to get the inflow and pay the existing credit of the bank.
Small and medium-sized NBFCs have been hit the most then the big NBFC’s.
A lot of players will want to conserve liquidity, so we may see top-rated NBFCs in India, raising new money to pay back the old (debt). So, the mid-sized NBFCs will be hit the most because they may have to dip into their reserves to pay back these liabilities.
The Ministry of Home Affairs, during the extended lockdown period, released a circular giving the details of the businesses that will function in the lockdown period.
In the first phase of lockdown, the government only enabled banks to work, stating it under essential services. The new order applies to all the financial institutions across all states in the country after the request was made to the government by NBFCs and MFIs to allow them to operate similar to the banks.
On 17th April, 2020, RBI Governor Shaktikanta Das announced that it has been decided to conduct Targeted Long-Term Repo Operations (TLTRO) 2.0 at the policy repo rate for tenures up to three years for a total amount of up to ₹ 50,000 crores, to begin with, in tranches of appropriate sizes. Measures to maintain adequate liquidity in the system by facilitating bank credit flow and ease financial stress would also be taken.
The funds availed under TLTRO 2.0 shall be deployed in investment-grade bonds, commercial paper (CPs) and (NCDs) non-convertible debentures of (NBFCs). At least 50 percent of the total funds availed shall be apportioned as given below:
The asset size shall be determined as per the latest audited balance sheet of the investee institution/company.
For NBFC and HFC investors in Banks, the provision of higher liquidity and relaxation in provisioning norms are welcome. Still, there is a bar on dividend distribution, and new provisioning norms are negatives for the time being. While the RBI is doing its part in providing reliefs in the current times, the street could keep expecting more, and there could also be some concerns about the time it would take for these measures to have an impact at the ground level.
About one-fourth of the rated non-banking lenders are below investment grade and can’t access the liquidity window individually. ICRA said that out of 250 rated non-bank lenders, about 40 are below investment grade. At the same time, data from Micro-finance Institutions Network (MFIN) showed that 25% of their members fall in the junk category.
Large lenders will be able to take benefit of RBI’s Rs 1 lakh crore targeted longer-term refinancing operations (TLTRO) window, but others are likely to face a crunch.
The majority of the NBFCs can’t sell bonds on the individual capacity to get liquidity. So, NBFCs are planning to come together and sell their bonds to the bank for the funds raised through the targeted long-term repo operation mechanism to finance corporate and other lenders.
The pooled issues will help many NBFCs, including microfinance firms, especially those below investment grade, to access the TLTRO liquidity tap since their credit rating will likely head north, lowering borrowing costs.
The pooled bond structure typically helps smaller enterprises that face difficulty in raising funds from diverse investors at competitive prices.
Medium Size NBFCs have already reached out to banks seeking credit lines. Others would find funds from more prominent NBFCs. While some of them may not qualify under the investment grade, they would still be able to avail refinancing facility from SIDBI or NABARD.
This is a great initiative taken by the government as it will not only help in providing the liquidity and easing the impact of coronavirus on the NBFC sector but also provide loans to the needy even in the current situation and help in building the economy.
The latest measures taken by the RBI will soften the near-term credit negative impact on non-banking financial companies, NBFCs’ funding and liquidity but are unlikely to boost the credit flow to the broader economy.