The refinance scheme announced by the Reserve Bank of India (RBI) on April 17, intended to help small non-banking finance companies (NBFCs) and microfinance institutions, may ultimately not benefit the cash-starved firms.
According to the terms detailed in the circular issued by the Small Industries Development Bank of India (SIDBI) to CMDs of commercial banks, NBFCs and MFIs under the tag of ‘scheme for special liquidity support for MSMEs (micro, small and medium enterprises), the loan needs to be repaid within a period of 90 days. Also, MFIs and small companies need to have a minimum BBB- rating as on March 31.
These two conditions will render majority of MFIs and small companies ineligible for the scheme.
"Which MSME or MFI can repay the money in 90 days in such a situation. Also, the stipulation that BBB- rating is needed even to get considered by banks is a big jolt for small companies that really need this money," said P Satish, Executive Director of Sadhan, an industry body.
SIDBI has received Rs 15,000 crore from the central bank under the liquidity support scheme.
Due to the repayment clause and the minimum rating required, most MFIs are not even approaching SIDBI for refinance facility, Satish said.
Out of the 215 members of Sadhan, only 30 MFIs have even BBB- rating. There are 66 NBFC-MFIs under Sadhan. “If the rating stipulation can be up to BB, many of these companies will benefit. Very few have BBB-. One should understand the profile of these companies. A god chunk of the microlenders are not main stream companies,” said Satish.
According to Harsh Srivastava, Chief Executive of Mfin, another industry body for MFIs, only 39 out of its 53 members have BBB- rating. Only one company has AA rating. MFIs typically lend to low-income borrowers, who are mostly daily wage earners or run micro businesses. These loans are given for 18-24 months at a rate of 21-23 percent. The average loan ticket size is around Rs 30,000.
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Meeting the 90-day repayment requirement is impossible for NBFC-MFIs and MSMEs to comply since their cash flows have dried up severely. The bigger NBFCs may have the bargaining power to negotiate roll over of these loans beyond 90-days that will then lead to evergreening of loans. But, small firms with low rating do not stand a chance.
Banks typically prefer big companies with top ratings for giving loans due to the perceived high-risk. Banks fear that once the lock-down period is over, MFIs will see large scale defaults and RBI’s temporary measures may not come to their rescue then. The lending decisions will be questioned at that point when bad loans spike.
In his second presser to address COVID-19 relief measures, RBI Governor Shaktikanta Das had announced refinancing support to the tune of Rs 50,000 crore through all India financial institutions such as NABARD, SIDBI and NHB.
The central bank said NABARD will be given Rs 25,000 crore for refinancing regional rural banks (RRBs), SIDBI will be given Rs 15,000 crore and Rs 10,000 crore will be given to NHB for supporting housing finance companies (HFCs). Advances under this facility will be charged at the RBI's policy repo rate at the time of availment, .
The other liquidity measure announced by the RBI through targeted long term repo operation (TLTRO) too will not benefit smaller firms since allocation of this funds is more tilted towards larger NBFCs.
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