On a closer look, the second round of COVID-19 relief measures announced by Reserve Bank of India (RBI) Governor Shaktikanta Das on April 17 is a careful balancing act.
The RBI has indeed opened up some room for Non-banking finance companies (NBFCs) and cash-starved microfinance institutions (MFIs) to avail funds by asking banks to deploy half of the money raised under the targeted long-term repo operations (TLTRO) in these companies.
Also, a separate refinancing window has been allowed for Nabard and Sidbi to help small firms. The RBI has also permitted banks to relax asset classification norms during the moratorium period. But, there was a big catch for NBFCs in the RBI presser that went unnoticed by many.
Das has been silent on the biggest demand from NBFCs–moratorium on the loans NBFCs borrowed from banks. This silence has come as a big disappointment for NBFCs. The sector has about Rs 7 lakh crore loan outstanding from banks. NBFCs, MFIs and HFCs have been asked to give moratorium to their borrowers but banks aren’t offering the same to these companies.
This meant that these companies will have to continue making their payments to banks even as their payments won’t come from borrowers during the moratorium period. This has created a liquidity distortion for these firms and a lack of level playing field. During the presser and later in the detailed statement issued by the RBI, there is no mention of extending the moratorium facility to NBFCs.
In a conversation with Moneycontrol on April 16, Harsh Shrivastava, Chief Executive Officer of MFIN said that NBFC-MFIs are likely to see up to 25 percent fall in the collections on account of the moratorium extended to borrowers.
“Our biggest demand was for a moratorium for the loans NBFCs owe to banks. There is no clarity on that yet. The RBI governor was silent in his presser about this,” said Kishor Kumar Puli, managing director and CEO of Pradakshina Fintech, an NBFC based in Hyderabad that operates among small borrowers as a corporate business correspondent.
Liquidity measures positive
The RBI mainly announced few liquidity measures on April 17. These included fresh TLTROs worth Rs 50,000 crore (half of which should go to small companies) and Rs 50,000 crore refinancing facility for All India financial institutions like Nabard.
Also, the reverse repo rate reduced to 3.75 percent from 4 percent to disincentive banks from parking money in the RBI for just 3.75 percent. The RBI also increased the WMA limit for states by 60 percent to ease their burden. Considering the slowdown in the economy, the RBI has allowed lenders to relax NPA classification norms for borrowers, excluding the moratorium period from the 90-days NP classification rule.
Also, Liquidity Coverage Ratio for banks too has been brought down to 80 percent from 100 percent. Further, with respect to loans to commercial real estate, the RBI said, NBFCs can offer relaxations. These are all positive measures.
But, right now, liquidity is the biggest worry for small companies and NBFCs. Although the RBI had introduced targeted long term repo operation (TLTRO), much of the money raised under this facility by banks (Rs 75,000 crore in three rounds) has been deployed in the papers of top rated companies. On April 17, while announcing Rs 50,000 crore additional TLTRO, the RBI said that at least 50 percent of the money raised should be deployed in small companies. This is aimed at nudging banks to lend more to small companies. But, analysts are not sure whether this will happen for sure.
“When a bank has money to deploy and if it can choose between AAA rated companies and low-rated firms, the money will definitely go to the AAA company,’ said Siddarth Purohit, analyst at SMC Global. “It needs to be seen whether this time small companies get a preference,” Purohit said.
However, the industry is pinning its hopes on the central bank’s decision to allocate Rs 50,000 crore to Nabard, SIDBI and NHB to lend to small-borrower focused institutions such as MFIs.
“This is a positive move since these organizations would know the needs of the sector well,” said Ajay Kanwal, the managing director and CEO of Jana Small finance bank. “I wish the amount allocated was bigger, say around Rs One lakh crore,” Kanwal said.
What will happen to moratorium demand of NBFCs now?
The decision on moratorium for NBFCs by banks is now largely up to the banking industry. It was the bank lobby, Indian Banks Association (IBA) which decided that financial intermediaries like NBFCs need not be given moratorium facility. The RBI circular hadn’t specifically excluded NBFCs. IBA is likely to meet tomorrow to decide on the moratorium demand by NBFCs. Now, the decision is totally up to the industry.
While announcing relaxed asset classification rules, the RBI also hiked the provision banks need to set aside for loans that are being given temporary relaxation. This could hurt banks’ liquidity in the near-term but will safeguard the industry in the event of major asset quality deterioration in the future.
“(Banks) will have to maintain higher provision of 10 per cent on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts,” the RBI said.Overall, the RBI measures announced by Governor Das on April 17 were tilted towards small companies. The liquidity measures may indeed help small companies if banks choose to lend low-rated firms. But with no clarity on loan moratorium, one needs to wait and watch whether NBFCs may actually gain much from RBI’s measures.