As per a report, Non-Banking Financial Companies (NBFCs) may face liquidity challenges due to lack of clarity on moratorium by RBI and the lockdown across many parts of India also does not help the cause. If liquidity issues were not enough, the Covid-19 impact on NBFCs has threatened to worsen. What is the liquidity concern with Non-Banking Financial Companies? NBFCs may face liquidity issues as there is no clarity on the RBIs’ moratorium applicability on their bank loans. NBFCs have desired clarity from the Reserve Bank on the applicability of moratorium and on access to a formal liquidity window that can ensure structural liquidity help to them just like for banks. As per the RBI study, the present financial situation, and development in the mutual funds' sector, there is a possibility of liquidity pressure staying elevated for some of the NBFCs. It further stated that those NBFCs with high dependencies on market borrowing are more vulnerable to experiencing liquidity pressures. Though the Reserve Bank has taken some regulatory and liquidity measures, which will have some impact on the financial market but stress is still visible in some areas. The RBI study stated that there is a need for ensuring the flow of credit to NBFCs with concrete credit backstop in order to address the risk aversion in the system. How does asset-liability mismatch impact Non-Banking Financial Companies? NBFCs were already battling stress, and the RBI relief package has further raised the stress as it is now left with a stark asset-liability mismatch. The NBFCs have been asked to provide moratorium to its debtors, but its lenders have been unwilling to extend such relief. This challenge has been much more for NBFCs with a high share of capital market borrowings as the moratorium has not been announced for capital market borrowings and repayments on it have to be made on time at a time when collections are impacted severely. In case of India Bulls Housing finance vs. Securities and Exchange Board of India, interim relief was sought for postponement of servicing of its commercial papers and bonds by the petitioners. The petition was withdrawn subsequently, but the ailing condition of the NBFC sector was highlighted. The banks are of the view that if a moratorium is provided to NBFCs, then they may use the cash flows to meet their obligations for capital market borrowings instead of on-lending. After the nod from RBI, some of the banks have started considering the NBFC proposals for a moratorium on a case to case basis. Risk Aversion of Banks As part of the RBI relief package, the RBI had announced the Targeted Long-Term Repo Operations. The risk-averse banks used the money from the RBI at the reduced repo rate to invest in debt securities of top-rated companies that already had cash, thereby diminishing the purpose of the RBI relief package. Thereafter the RBI announced revised Targeted Long-Term Repo Operations with a view to channeling the liquidity to small and mid-sized corporates. Half of the liquidity under the revised Targeted Long-Term Repo Operations was targeted towards the NBFC sector. The Supreme Court realized how the liquidity infused under the repo operations undertaken by the RBI was inaccessible to sectors that were profoundly impacted by the Covid-19 pandemic, and asked the RBI to give effect to the RBI relief package in its letter and spirit. What is the impact caused due to the liquidity crisis triggered in the NBFC space? As per the report of CARE (Credit Analysis and Research) ratings, the borrowing profile of Non-Banking Financial Companies has changed from capital market instruments to bank borrowings. Moreover, debt issuance in the primary market shows that the share of financial services has reduced since last year. Apart from it, the funding challenges can rise again as banks have become more selective in extending credit. The increase in risk aversion of investors has reduced the allocations by mutual funds, thereby resulting in lower issuance of commercial papers. The current situation is challenging for NBFCs as they are finding it tough to raise funds from the capital market owing to higher cost and lack of funds availability. Due to this crisis situation, Non-Banking Financial Companies have limited funding access to primary markets, and banks have become the major source of their financing needs. Now the recent Covid-19 pandemic caused disruptions have further impacted the market and the financing conditions of the NBFC sector. What measures have been taken to improve the crisis situation that NBFCs find themselves in? The Reserve Bank of India, apart from cutting its benchmark repo rate by 35 basis points, has announced some measures to ease the liquidity constraints faced by the Non-Banking Financial Companies. The Reserve Bank has stated that it has been monitoring the situation and has been taking steps to ease the challenges faced by the NBFCs. One of its latest measures includes harmonization of single counterparty exposure limits for exposure of banks to single NBFC with a general single counterparty exposure limit. The government has also initiated schemes for NBFCs like the Special Liquidity Scheme and the Partial Credit Guarantee Scheme, which are expected to improve the market financing conditions for the sector. Hopefully, the slew of measures will benefit the NBFCs in the long run and, most importantly, pull them out of the hardship due to the liquidity crisis and disruptions owing to Covid-19. Conclusion Non-Banking Financial Companies are one of the essential pillars that promote inclusive growth in the country by providing to the diverse financial needs of banks excluded customers. Therefore these financial institutions must be taken care of, and solutions must be implemented to tackle the challenges.