According to RBI data, outstanding loans to NBFCs from banks stand at Rs7 lakh crore. On a year-on-year basis, this exposure has grown by 22 percent. That is a significant exposure.
After the collapse of IL&FS and DHFL, the non-banking finance companies (NBFCs) have had a tough time to convince their investors and customers to regain the lost trust. The liquidity scenario had turned much worse for these companies for several months, before easing up a bit in recent months.
Once again, these companies are finding themselves in a tough spot. COVID-19 has thrown them an impossible challenge to solve. Under the Reserve Bank of India (RBI) loan moratorium/ EMI deferral rules (part of the COVID-19 relief measures by the central bank), the NBFCs come under the ‘lending institutions’ category, hence supposed to offer loan EMI moratorium to their borrowers.
But, at the same time, NBFCs themselves are borrowers of banks. These entities rely heavily on bank loans to survive (besides raising money from the market). But, under RBI rules, the NBFCs are not eligible to avail the three-month loan moratorium offer from banks. This is clear from the RBI circular on loan moratorium as well as from a questionnaire prepared by the Indian Banks Association, an industry lobby group of banks. This scenario has put the NBFCs in a problematic position. The EMI deferrals to borrowers will mean that a short-term liquidity shortage even when they need to keep repaying banks.
According to RBI data, outstanding loans to NBFCs from banks stand at Rs 7 lakh crore. On a year-on-year basis, this exposure has grown by 22 percent. That is a significant exposure.
Raters flag caution
In a report on Thursday, rating agency Crisil said non-availability of moratorium facility will be a double whammy to NBFCs. The liquidity cover available with Crisil-rated NBFCs will decline sharply if they cannot avail on their own bank borrowings the moratorium announced by the RBI in its 'COVID-19 Regulatory Package', the agency said.
“NBFCs face a double whammy because they are offering moratorium to customers despite not getting one themselves from their lender-banks. That will put significant pressure on liquidity profiles of many NBFCs,” it said. According to the rater, liquidity pressure will increase for nearly a quarter of them if collections do not pick up by June 2020. These NBFCs have Rs 1.75 lakh crore of debt obligations maturing by then.
“With collections minimal and the moratorium only for their borrowers, raising fresh funds is critical, especially because NBFCs, unlike banks, do not have access to systemic sources of liquidity and depend significantly on wholesale funding,” Crisil said. Recently, NBFC-MFIs had written to the RBI seeking to clarify the position on EMI moratorium. These companies are mainly in the business of lending small loans to low-income groups, including daily-wage earners whose incomes are likely to get affected during the lock-down. These NBFCs are also likely to see a spike in their bad loans as repayments may suffer in the wake of economic slowdown and COVID-19.
For NBFCs, the RBI has given a liquidity window for corporates through the targeted long-term repo operations (TLTRO) route. Banks can also invest in the commercial papers and non-convertible debentures of top-rated companies. But, smaller, low-rated companies do not benefit from this much. On Thursday, the RBI said it had received Rs 1.13 lakh crore worth of bids in the TLTRO conducted for an amount of Rs 25,000 crore with a three-year tenor. The central bank said liquidity availed under TLTRO by banks has to be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020.Banks have to acquire up to 50 percent of their incremental holdings of eligible instruments from primary market issuances and the remaining 50 percent from the secondary market, including from mutual funds and non-banking finance companies, the RBI had said. The NBFCs have approached the RBI for relief in the moratorium rules so that these firms won’t fall into a liquidity trap. Will RBI pay heed?