Is RBI’s liquidity shot failing to reach small firms gasping for money?

In the wake of COVID-19, the Reserve Bank of India (RBI) announced on 27 March an array of liquidity easing measures for the banking system so that the fund flow to companies would not suffer in a faltering economy. A part of the measures was the launch of targeted long term repo operation (TLTRO) which let banks borrow upto Rs1 lakh crore from banks. The idea was to get banks fund investment grade companies including smaller companies facing liquidity squeeze on account of COVID-19 impact. So far the RBI has announced three tranches of TLTRO to infuse Rs 75,000 crore to the system. Which companies have got money so far?

Big ones took the money

According to primary dealers and bankers, mainly AAA rated top companies got money from banks. “Largely the tilt is towards big companies because banks want to play safe,” said a bond dealer. “NTPC raised about Rs4,000 crore at 6.55 percent issuing three year paper. Last week, NHB raised about Rs2,000 crore. Banks are making a decent 2.15 percent margin here,” said a senior official at a primary dealership.

“But, I doubt whether below AAA companies are getting money,” the dealer said. The big companies, which are getting money at 6.55 percent may be using this to refinance their existing debt but for small firms, this will be survival capital. The absence of liquidity availability could further weaken their balance sheets ahead.

Under the TLTRO plan, the RBI asked banks to make sure they have to deploy this money in investment grade corporate bonds, commercial papers, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, the RBI said.

Banks have to acquire up to fifty per cent of their incremental holdings of eligible instruments from primary market issuances and the remaining fifty per cent from the secondary market, including from mutual funds and non-banking finance companies.

Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 percent of total investment permitted to be included in the HTM portfolio, the RBI said.

NBFCs suffer

NBFC may not be benefitting much from this liquidity window as banks prefer to play safe. Also, the crisis is severe for NBFCs as under RBI rules, these companies have to offer moratorium to their borrowers. But, at the same time, NBFCs are not getting the loan moratorium option from banks. NBFCs borrow heavily from banks to raise resources. Presently, banks have a loan outstanding of Rs 7 lakh crore to NBFCs.

"We expect the asset quality of these three companies (NBFCs) to deteriorate on the back of rising loan delinquencies and defaults, as some customers and businesses will struggle with payments given declining earnings due to the 21-day nationwide lockdown across India," says Alka Anbarasu, a Moody's Investors Service Vice President and Senior Credit Officer.

On Monday, Moody's announced rating actions on three NBFCs. Moody’s has placed Hero FinCorp Limited's local and foreign currency Baa3 issuer rating under review for downgrade. Also, the agency has put India Infoline Finance Limited's Ba3 Corporate Family Rating (CFR), (P)Ba3 foreign and local currency senior secured MTN program ratings, and Ba3 senior unsecured debt ratings are placed under review for downgrade. Besides, it has put Muthoot Finance Limited's Ba2 CFR outlook changed to negative from stable.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, volatile oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets, Moody’s said.

NBFC-MFIs may see high bad loans

The liquidity worries may be bigger for NBFC-MFIs since there is a likelihood of higher defaults from customers who are mostly low-income groups, severely hit by the economic slowdown and COVID-19 lock-down. MFIN, an industry lobby of NBFC-MFIs, has approached the government asking for a moratorium facility for these entities from banks.

“56 million microfinance clients should get full moratorium on repayment till May end but NBFC-MFIs need lenders to give them back to back support now,” said the industry body. The effect of the COVID-19 pandemic is being played out and many small companies had to cut staff already. Industry fears that many small and medium sized companies will find it difficult to get back on their feet if the lock-down period extends up to 30 April.

What’s the way out?

In order to help smaller companies, the RBI will have to either extend the moratorium facility to benefit NBFCs or announce a separate window exclusive to this category of companies, experts said. The EMI moratorium will have to extend for at least six months so that companies suffering business losses under the lock-down period can get back on their feet once again.