RBI's measures may not get desired results; pain unlikely to go away for NBFCs

India's financial space is experiencing acute liquidity crunch and the Reserve Bank of India recently came up with a string of measures to address the problem but experts say steps are unlikely to help the banks and NBFCs.

On April 17, the central bank said it would conduct targeted long term repos operations (TLTRO) 2.0 for Rs 50,000 crore, to begin with.

Aimed at easing liquidity for NBFCs, at least 50 percent of the total amount availed under TLTRO 2.0 would be going to small- and mid-sized non-banking financial companies (NBFCs) and microfinance institutions (MFIs).

"At least 50 percent of the amount must go to the mid and small-sized NBFCs and MFIs. Exposure in this facility will not be reckoned under the large exposure framework. TLTRO 2.0 investments may be classified as HTM (held to maturity)," RBI Governor Shaktikanta Das had said.

However, brokerages say, the liquidity available through the LTRO window is negligible compared to the actual crunch.

Brokerages say the central bank will have to come out with measures at regular intervals to ensure NBFCs have adequate liquidity because a consistent shortage, with negative carry on excessive cash on books and pressure on yields, will put pressure on the margins for NBFCs.

"Without the term-loan moratorium, liquidity pressure on NBFCs is inevitable. With banks continuing to abstain from providing the necessary liquidity to NBFCs- especially the mid and small NBFCs-the RBI would require to infuse further liquidity at regular intervals in order to avoid any systemic issues (similar to post ILFS crisis) for NBFCs as well as for the entire financial system," said brokerage firm Emkay Global.

Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote, is of the view that the RBI’s big bang stimulus was not a bazooka after all, given the expectations, rather it was a conservative approach and indicated a piecemeal manner of infusing liquidity. The measures, though significant, were not substantial enough as Rs 50,000 crore in the form of TLTRO is rather conservative.

The new measures are welcome and will serve to ease financial conditions on the margin but the real issue may be something else--the disbursement of credit, say experts.

“It is possible that the RBI is still somewhat underestimating the fact that the real problem (in our view) is that of inadequate availability of risk capital in the system.

Thus, some of the “push” measures may likely have limited impact. As an example, banks’ may still hesitate to lend to weaker credits under the new TLTRO since the dispensation is on market risk and not credit risk,” said Suyash Choudhary, Head – Fixed Income, IDFC AMC.

“As another, while the lower reverse repo is a good push incentive, a more powerful one could have been general time-bound HTM relaxations for banks investment in government bonds,” he said.

While it is commendable that the RBI acted swiftly to offer the liquidity window and cut the reverse repo rate to support NBFCs, experts say banks need to ensure that the credit transmission takes place regardless of the credit-ratings.

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