On the morning of April 17, Reserve Bank of India (RBI) Governor Shaktikanta Das came out to ease the pain of the Non-Banking Finance Corporations (NBFCs) and Micro Finance Institutions (MFIs) by opening up an additional Rs 50,000 crore window for them as well as allowing relaxation in the asset recognition norms.
Another Rs 50,000 crore, Shaktikanta Das said, would be injected through National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB). These were some of the hurdles identified while working out the lockdown exit strategy.
NBFCs had been complaining that the commercial banks were not extending the moratorium on the repayment of loans (as per the March 27 circular of RBI directives). The NBFCs, on their part, are also duty-bound to give moratorium to their respective borrowers. They believe this is already creating a cash mismatch.
The NBFCs, as shadow banks, work as intermediaries and have access to capital via the banks, pool funds and debt. Roughly 18 per cent of the commercial banks’ exposure is in NBFCs. The total outstanding bank loans to the NBFCs are roughly Rs 7 lakh crore.
Also, the shadow banks still haven’t come out of the shock after the IL&FS collapse. The issue had reached the Prime Minister’s Office and officials there asked the RBI and the Nirmala Sitharaman-led finance ministry for ways to resolve the issue.
On April 17, Finance Minister Sitharaman briefed PM Narendra Modi and the PMO officials on the new proposals.
The RBI governor also announced on Friday morning the second phase of the Targeted Long Term Repo Operations (TLTRO), where papers worth Rs 50,000 crore would be auctioned for banks. The banks buy the commercial papers to route the fund into these institutions including NBFCs.
Out of this, it is mandatory for banks to inject at least 50 per cent in the small and medium-size NBFCs and MFIs (microfinance institutions). The banks need to make these investments within one month of receiving liquidity from RBI.
Earlier, on March 27, the RBI initiated the first phase of TLTRO to inject funds worth Rs 1 lakh crore in NBFCs. But the funds didn’t reach the NBFCs catering to the small and medium enterprises.
Since most of the sectors require liquidity, and because of the better ratings, most of TLTRO 1.0 either ended up with the PSUs or with the bigger corporate houses.
The guidelines issued by the Ministry of Home Affairs, on April 15, maintained that some activities – like the movement of trucks, food processing industries, pharmaceutical units, retail via e-commerce-might begin.
Many of these businesses depend on the NBFCs for working capital requirements. The NBFCs say unless the issue of the moratorium is not resolved, the threat of a credit squeeze in the market will continue. The threat is real, most NBFCs – the small and medium ones – might collapse rather than extend support.
The problems started mounting when India’s largest public sector bank, the State Bank of India (SBI), and then the Indian Banking Association (IBA) left out NBFCs, MFIs and the Housing Finance Corporations.
Then, following the Delhi High Court hearing to the plea of NBFC, Indiabulls Commercial Credit (ICC), seeking the benefit of the moratorium from the Small Industry Development Bank of India (SIDBI), the latter asked the RBI for clarity.
Now, NABARD will have additional funds of Rs 25,000 crore, SIDBI Rs 15,000 crore and NHB Rs 10,000 crore so that they can extend the benefits to their customers.
But even with the RBI move, the banks may continue to deny the moratorium citing the easing of liquidity provisions to these lending institutions.
The NBFCs are actually a heterogeneous mixture of players – some of them, say, HDFC Ltd, Bajaj Finance, HDFB Finance, LIC Housing Finance and Tata Capital etc are as big as small banks.
Critics say a benign view on this has led to unfair advantage to the big players, pinching the small and medium NBFCs. On April 17, the RBI, for the first time, also made a distinction between big and small NBFCs.
Earlier, the RBI officials would cite the top 100 NBFCs (out of the universe of 10,000 with assets of Rs 32 lakh crore between them) who control 80 per cent of the assets and say they have sufficient liquidity in terms of assets to survive the coronavirus-induced cash squeeze.
But they forget, the rest fund the small, micro and medium businesses – that are actually bearing the brunt of the lockdown. This includes the taxi drivers, truck owners, delivery boys working with e-commerce players, micro and smaller businesses like traders, shopkeepers, construction equipment and various services for the informal sector-most with no track record.
To explain in simple terms, these NBFCs take capital from banks on a cheaper interest and extend the credit to more ‘riskier’ consumers, those which the banks wouldn’t touch because they don’t understand the business models or find it too small a ticket to spend their resources on.
The RBI allows the banks to deploy funds in NBFCs via the investment-grade corporate bonds, commercial papers and non-convertible debentures. The NBFCs’ commercial papers worth Rs 1 lakh crore and non-convertible debentures worth Rs 87,000 crore are due by June this year. If the moratorium is not extended, the CEOs of these NBFCs say many of them will go bust.
“Many of our customers deploy their assets on a daily basis and earn and repay instalments. In some cases, they flirt with the delinquency provisions,” says TT Raghavan, MD of Sundaram Finance.
“They may delay 1-2 installments when the business is lean. But in the peak deployment season, they will pay back overdue instalments and become current. These customers may not have been able to pay during the period, March 20-31, and will not be able to pay during the lockdown period since their earnings have come to a halt.”
Many of the NBFCs have not been getting repayments post-March 19 – when PM Narendra Modi gave his first address to the nation on Covid-19.
The RBI governor, on April 17, also clarified that the NPA norms will not consider the three months — non-payment from March 1 to June 1 — to classify any asset as non-performing.
Like the banks, the NBFCs, too, are allowed to push the date for commencement of commercial operations (DCCO) for loans extended to commercial real estate by an additional one year without considering it as restructuring.
Once the consumers start repayment cycles, the commercial banks also buy out many of the loans from the NBFCs -that exercise of securitisation is called pool funds. So it is in the interest of these NBFCs to keep good care of not just their own health, but also of the consumers.
The NBFCs will also require funds to inject (capitalise) life back into many of these customers once the lockdown ends.
The challenge doesn’t end here. The RBI and finance ministry has finally given in to the needs of the shadow banks. Now, when the PMO rolls out the second phase of PM MUDRA Yojana (loans up to Rs 10 lakh to the non-corporate, non-farm small/micro enterprises), they will be calling in the favour to demand better implementation from the NBFCs.