RBI announces more measures to nudge banks to lend to small NBFCs. Will lenders act at least now?

RBI Governor Shaktikanta Das (PTI)

The Reserve Bank of India (RBI) on Tuesday allowed a few more measures to nudge banks to invest in small non-banking finance companies (NBFCs) and microlenders gasping for money.

As part of the measures, the central bank said banks can exclude the amount invested in these companies for the purpose of determining priority sector targets/sub-targets. This exemption is only applicable to the funds availed under TLTRO 2.0, the RBI said. Under PSL rules, banks have to necessarily lend a certain percentage of the total advances to economically weaker sections.

The RBI is attempting to nudge the banks to lend to the small NBFCs and MFIs which were not getting sufficient funds under the liquidity easing measures announced by the RBI since banks preferred to invest in the papers of AAA-rated big companies. Smaller NBFCs and MFIs typically do not get preference since these companies are perceived to be high-risk borrowers and normally carry lower ratings. These firms are struggling for funds hit by the prolonged lockdown announced by the government to fight COVID-19.

“In order to incentivise banks’ investment in the specified securities of these entities (small NBFCs), it has been decided that a bank can exclude the face value of such securities kept in the HTM category from computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets. This exemption is only applicable to the funds availed under TLTRO 2.0,” the RBI said in an FAQ released on Tuesday.

Under TLTRO 2.0 to the tune of Rs 50,000 crore, banks will have to deploy half of the funds in small NBFCs and MFIs. According to RBI circular, of the 50 percent earmarked for small companies, 10 percent should be invested in the securities/instruments issued by MFIs, the RBI said. A further 15 percent in securities/instruments issued by NBFCs with asset size of Rs 500 crore and below and 25 percent in securities issued by NBFCs with assets size between Rs 500 crore and Rs 5,000 crore, the RBI said. In other words, companies will receive a share of this money according to their size.

On Monday, Moneycontrol reported that the RBI is unhappy with banks being ‘selective’ and ‘cherry-picking’ its instructions on the issue of extending loan moratorium facility to NBFCs. The RBI is of the view that it has never prohibited banks from doing so. There is an ongoing tug-of-war between the banks and NBFCs on this matter.

Under TLTRO 2.0, banks have to deploy funds within 30 to 45 working days from the date of the operation. Funds that are not deployed within this extended time frame will be charged interest at the prevailing policy repo rate plus 200 bps for the number of days such funds remain un-deployed. The incremental interest liability will have to be paid along with regular interest at the time of maturity.