Fund-starved small, medium NBFCs say govt, RBI liquidity measures didn’t help; write again to FM seeking relief

Non-banking finance companies have written to Finance Minister Nirmala Sitharaman saying the liquidity crunch that has affected small and medium sized NBFCs persists even now. This is despite the measures announced by the Reserve Bank of India (RBI) and government in the recent months, they said.

“Despite the steps taken, the situation for small and medium sized NBFCs has not changed significantly, and these companies continue to face difficulties in raising funds,” says the letter written by Finance Industry Development Council (FIDC), an industry body of NBFCs.

Moneycontrol has reviewed the letter.

The central bank announced targeted long term repo operations (TLTRO) while the government, as part of the economic package, announced a partial credit guarantee scheme and special liquidity schemes to help NBFCs.

These measures have largely benefited only the big NBFCs while smaller once are starving for funds, said the FIDC letter. Since the schemes announced so far stipulated on minimum investment grade credit rating, smaller NBFCs couldn’t benefit.

The Rs 30,000 crore special liquidity facility announced for NBFCs failed to cheer NBFCs on account of the shorter repayment period of three months, whereas NBFCs have been asking for at least three year time to repay funds.

Banks turned highly risk averse towards NBFCs in the aftermath of the Infrastructure Leasing & Financial Services (IL&FS) and Dewan Housing Finance Corporation (DHFL) crisis in 2018. Since then, the funding scenario has improved for NBFCs but COVID-19 has further worsened the situation.

NBFCs mainly source funds from banks and raise from markets. However, only highly-rated, large NBFCs typically raise money at cheaper rates from markets. There are not too many takers for smaller ones and low-rated companies.

“The interventions by the government through TLTRO 2.0, PCG 2.0, Special Liquidity Scheme etc targeted to infuse liquidity has provided only a limited relief to small and medium sized NBFCs as most of the money has flowed into a small number of large NBFCs, which are highly rated,” said FIDC.

Due to a major withdrawal of funding by mutual funds, insurance companies etc, even large companies have been borrowing mainly from banks. This has left hardly any space for small and medium NBFCs and have been crowded out, and banks have been citing sectoral exposure caps to deny the credit facilities to these NBFCs, the letter said.

The industry lobby has suggested the government create a fund dedicated to funding small and medium NBFCs through organisations like Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development (NABARD), and such funding be made available by way of term loans for a tenure of three-to-five years.

Also, the industry body has requested the government to make funding available to all NBFCs, irrespective of their size and credit rating (even unrated), should be eligible, it said, adding key balance sheet parameters such as capital to risk assets ratio (CRAR), net performing assets (NPAs), track record along with promoters experience and understanding of the market should be the important consideration.