Around February-March 2020, the world around us comes to standstill as the deadly Coronavirus attacks every segment of the society, hampering not just the health but also slows down the economy. The sudden outbreak brings survival challenges to almost every industry. India, in particular, faced a major blow due to the Covid induced lockdown, which was important to be announced to put a curb on the spread of the virus but it definitely affected the economy to a great extent. The impact of this on Non-Banking Financial Companies (NBFCs) brought double whammy. On one hand the ongoing liquidity challenge was a matter of concern and with the pandemic, low cooperation from banks in terms of funds dispersal, the problems for NBFCs inflated. However, with slew of measures announced by the centre in support of NBFCs, a ray of hope is definitely making its way to opportunities. On the basis of opinions from domain experts from across the industry, Rashi Aditi Ghosh of Elets News Network (ENN) explores the genesis of the problem and the ways to combat it.
The blow of liquidity crisis across several segments of the NBFCs is under a great pressure during to the persisting problem from the time of IL&FS fiasco which has now worsened due to the outbreak of Covid-19 because of which the economic activities or the financial capabilities of the borrowers is severely impacted.
With the low investment and repayment capacity sectors namely real-estate, NBFCs, micro finance, the loan scenario is worst hit during the pandemic. Industry reports suggest that the increasing loan losses and lack of new capital is likely to worsen the liquidity stress.
Raman Aggarwal, Co-Chairman, Finance Industry Development Council says, “A lot of confusion pertaining to the moratorium which was something that we had to give to our borrowers but unfortunately the banks and public finance institutions took a different view where they were they were reluctant to offer moratorium. Is moratorium is the solution or one time restricting is the answer to this problem. And then we have the RBI and the Ministry of Finance supported Aatma Nirbhar Package with some slew of measures. RBI announcing the asset freeze of classification with subject to 10 percent probation.”
Centre’s Support to NBFCs-MFIs
A series of measures were announced by the centre in a bid to rescue the NBFC sector from the liquidity crisis in the form of COVID-19 regulatory relief package by the Reserve Bank of India (RBI) on March 27, 2020.
This was announcement was made with a detailed annexure released on April 17, 2020 from the RBI pertaining to asset classification and provisioning norms (RBI Relief Package) which was intended to ease borrower investment stress.
According to RBI’s Relief Package, the NBFCs-MFIs were allowed to offer a moratorium of three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020.
This is now extended by another three months i.e., from June 1, 2020 to August 31, 2020, vide the notification dated May 23, 2020 issued by the RBI.
But, as a matter of fact, NBFCs use the cash flow in the form of loan repayments made by their borrowers to repay the liability owed towards their lenders. But the provision of moratorium to its borrowers on payment of loan instalments brings more trouble fir the industry as NBFCs operate on a short-term liquidity on their balance sheets.
Where lies the Challenge
NBFC-MFIs were already under stress due to liquidity crunch and with the announcement of the RBI Relief Package, a mismatch of asset and liability is now the new challenge.
While NBFCs are directed by the banking regulator to grant moratorium to the loan holders, its lenders (banks) are not supporting them well in terms of extending the relief. Several experts while interacting with Elets News Network on virtual discussion platforms have shared their concern on how they are facing the double-edge sword blow due to the situation.
Experts fear that in this situation the NBFCs with a better portfolio can still survive but small and Medium NBFCs with an asset size around 100-200 crore will have major sustainability issues. In their view, the relief announcement was timely and indeed a fair deal but its transmission to the banks is where the problem lies.
Pavan K. Gupta, Chief Executive Officer, Muthoot Housing Finance says, “ A lot of initiatives have been taken by the government and they were all made in the right direction. The moratorium was definitely needed and days past due (DPD) freeze was equally important else the Non-Performing Assets would have gone too high and that would have resulted in a serious situation of capital getting blocked. However, the implementation of these policies has been a challenge. The time lag is huge and in most cases, it is the banks that have to implement it. Within banks, private sector lenders I don’t think have been proactive in implementing any of the government initiatives. Despite of all the initiatives taken by the government, banks have been extremely reluctant and that has been the challenge. The capital may be going to the best players in the market but the ones who need it and deprived. Things have not changed much for small and medium NBFCs. For them it’s like a double edge sword, first there is a severe fund crunch and on top, moratorium had to given to the existing customers.”
NBFC Top Brass also point out that the IL&FS incident has somehow dented the faith of the banks on NBFCs but its time that they now analyze the repayment capacity of NBFCs and then decide to lend them rather than being reluctant during the times of urgent need.
Sanjay Sharma, Co-Founder & Managing Director, Aye Finance says, “There are several initiatives taken by the government to support NBFCs but they are challenges pertaining to the execution of those steps. Government has tried to set-up certain schemes such as partial credit gurantee scheme which have been put under SIDBI and NABARD. It also tried to lift TLTRO.NBFCs play a crucial role in seeing the micro and small enterprises and emerged as a woolmark of employment in the country. From that perspective, more needs to be done for the NBFCs not just small and medium but right across the platform if we have to reach the micro enterprises.”
“Transmission is something where the key challenge lies. I don’t agree that the banks are behaving as they normally do and they have every right to be picky about fund dispersal. In my view banks are there to take risk and asses risks. If we go into details, how many NBFCs have failed to repay their loans and gone out of business? Look at the track record of how NBFCs are run. We are very prudent lenders and want to make sure that our portfolios are well protected,” adds Shrama.
What is Targeted Long-Term Repo Operations?
As a part of its Relief Package, the RBI has also announced the Targeted Long-Term Repo Operations (TLTRO). The risk-averse banks used the money lended from the central bank at the reduced repo rate for investing only in debt securities of top-rated companies which were already had a lot of cash inflow, thus letting down the purpose of the RBI Relief Package.
Therefore, the RBI revised Targeted Long-Term Repo Operations (TLTRO 2.0) for channeling the liquidity to small and mid-sized corporates.
Half of the liquidity announced under the TLTRO 2.0 was aimed at the NBFC sector. As per the revised announcement 10% of the cash was directed towards buying securities issued by microfinance institutions, 15% for NBFCs with asset size of Rs 500 crore and below asset size, and 25% to securities of NBFCs sized between Rs 500 crore and Rs 5,000 crore. In the first auction under the TLTRO 2.0 for a bid amount of Rs 25,000 crore, the lenders put 14 bids worth Rs 12,850 crore for the three-year money offered.
The conclusion of the auction under the TLTRO 2.0 confirmed that the lenders have no interest in fresh exposures to risky assets.
D S Tripathi, Managing Director & Chief Executive Officer, Aadhar Housing Finance Pvt Ltd says, “Immediately after the announcement of the lockdown, an unprecedented situation occurred for the economy. Not just the economic disruption but the uncertainty on how lock the lockdown is going to continue was a big matter of concern. By now we have realized that we have to embrace uncertainty and live with it. Which this situation occurred, liquidity was a concern for everyone across the sector along with lending business and asset quality. Response from the Reserve Bank of India (RBI) and the Government has been very proactive and timely but the executive of the steps was a challenge. There are 10,000 NBFCs in India and hardly 274 NBFCs out of the lot are systematically important and the rest all are small size NBFCs and MFI having an asset size between 100-200 crore and the rating is BBB or BB or A. Though there has been a huge influx of liquidity, infused by the RBI, by various initiatives such as reduction CRR, introduction of TLRTO, and the banking system is also full of liquidity but it is questionable how the liquidity will reach the NBFCs. Bigger HFCs or NBFCs with AAor AAA rating never had a liquidity problem. Till May 2020, the liquidity was available but when RBI infuses liquidity, they introduced special TLRTO with 2. 0 for NBFCs.”
As a result of this, the Supreme Court on Thursday directed the Reserve Bank of India (RBI) to ensure that its circular on the three-month moratorium on loan repayment between March 1 and May 31 is implemented in its letter and spirit as it appears that banks are not extending the benefit to borrowers, as quoted by The Times Of India.
20 Trillion Stimulus package
As a part of its 20 Trillion stimulus package, the Government has aimed at providing liquidity support of Rs 75,000-crore to the NBFCs-MFIs. The liquidity support is proposed to be imparted under two separate schemes.
Durgaprasad Swaminathan, Chief Information Officer, Cholamandalam Investment And Finance Company Ltd says, “I think the government has taken a lot of initiatives to bring the financial services back into life. I think the transmission of what has been put on the banks to NBFCs is not fully effective. This is going to critical for NBFCs across the spectrum especially for the smaller ones weather they will be able to jumpstart their funding down to the MSMEs. This is going to be essential for the whole economy to comeback and regain the earlier scenario again. It is going to be critical that the whole transmission what the government intends reaches the actual players in the industry. The hub area would be the MSMEs and the channeling would definitely take sometime. The Agri area has actually experienced green shoots. We are seeing a lot more action in that segment. The Agri section is going to be the initial area where the interest on moratorium will reflect prior to spreading across other sections.”
The Monetary Policy statement and the statement on developmental and regulatory policies dated October 9, 2020 took some steps to boost the Indian economy.
1. Announcement of an “on-tap” TLTRO facility: This should enable banks to lend more to the deserving sectors and to finance NBFCs (especially the small and medium NBFCs) in a more constructive manner. We are confident that this step would go a long way to provide much needed long term liquidity support to NBFCs.
2. Extension of Co-lending arrangement to all NBFCs: This would enable deposit-accepting NBFCs as well as non-systemically important NBFCs to partner banks in reaching credit to unserved and under-served sections of the economy including MSMEs, small and marginal farmers and the financially excluded to a greater degree.
3. Risk weight revision for retail loans: This is expected to give a further boost to sectors such as affordable housing which have a significant ripple effect on the economy.
While the ongoing Covid challenge has doubled the pain of NBFCs and their concerns pertaining to liquidity crunch, centre and the RBI’s support is definitely relieving. However, the reluctant approach of banks is something that is worrying the NBFCs as they believe that the announcements are not transmitted to their lenders and this will escalate their problems more because they are granting moratorium but not getting any fund from banks and this making the situation worse for small and medium sized NBFCs.