The Reserve Bank of India (RBI) is unhappy with banks being ‘selective’ and ‘cherry-picking’ its instructions on the issue of extending loan moratorium facility to non-banking finance companies (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.
On March 27, RBI Governor Shaktikanta Das permitted all lending institutions to temporarily defer equated monthly installments (EMI) of all borrowers with respect to term loans to help them tide over the COVID-19 lockdown phase. On account of the prolonged lockdown, most economic activities have come to a halt, impacting the cash flows of borrowers. While NBFCs, including NBFC-MFIs, followed RBI's instruction in letter and spirit by deferring EMIs for all borrowers, the NBFCs did not get the same treatment from commercial banks from whom they borrow funds.
“Banks want to have their cake and eat it too. Selective/cherry-picking instructions. How come banks have clarity on what they want to do but look for excuses for things they don’t want to do? (sic),” said a senior RBI official on condition of anonymity. “We have not prohibited (banks from extending moratorium to NBFCs). So for every decision of theirs (banks), why should RBI need to clarify?” the official asked.
According to the data from the RBI, outstanding loans to the entire NBFC sector 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. NBFCs fear this disparity in treatment on moratorium will create short-term liquidity issues for them. In a meeting of Indian Banks Association (IBA) last Saturday, there was no consensus among banks on the moratorium issue. While some banks in principle agreed to the idea, some banks including State Bank of India (SBI) didn’t favour moratorium for all NBFCs, according to industry officials.
To give a perspective, the RBI circular, on March 27, didn’t say anything specifically on the NBFC moratorium issue. It was an FAQ from the industry lobby later that said financial intermediaries are not being considered for the moratorium. These entities can avail funds under the targeted long-term repo operation (TLTRO), the IBA said. So, essentially, it was IBA circular, not the one from the RBI, which set the rule for banks regarding moratorium extension for NBFCs. In other words, denying moratorium to NBFCs was a result of IBA interpretation of the RBI circular, not the RBI’s specific directive.
With no consensus in IBA meeting, the industry lobby is likely to move back to the RBI seeking clarity. But, the RBI’s view is that it never had any objection to banks giving moratorium facility to NBFCs and hence, further clarity on this issue isn’t required, the official said.
Why TLTRO is not a big option for small NBFCs/MFIs
NBFCs borrow from banks at 9-12 percent. The rate of interest differs depending on the rating of the institution and size of the loan. While the IBA suggested TLTRO for NBFCs as an option to get funds, NBFCs weren’t happy about this suggestion because banks preferred to deploy a good chunk of the money borrowed under the TLTRO window in big, top-rated companies rather than small firms. The RBI has already conducted Rs 1,00,000 crore worth TLTRO and has announced another Rs 50,000 TLTRO 2.0. In the first round, much of the benefit has gone to big companies like NTPC, NHB and Reliance.
In his second presser to announce COVID-19 measures, the RBI governor announced a few more liquidity measures for NBFCs. 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. While this is a good move, the detailed guidelines on allocation of money yet again put small NBFCs/MFIs at a disadvantageous position. 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.
But, again, the problem here is that in earlier rounds some of the big NBFCs, those with assets above Rs 500 crore, have already managed to get some funds from banks. Survival capital is not a big problem for large NBFCs. It was the smaller ones that were left out. In this round too, the big companies are allocated 25 percent of the 50 percent TLTRO funds. This means, once again, small MFIs and NBFCs will have to struggle to get funds. Banks typically prefer bigger firms with better ratings while investing money.
MFIs in bad shape
The crisis is deeper for NBFC-MFIs. In a note released on Monday, India ratings and research said the crisis will impact these companies in a big way. “India Ratings and Research expects MFIs and small finance banks (SFBs) to face severe asset quality issues in the short term, as near-term collections would see unprecedented disruptions on account of the COVID-19 linked nation-wide lockdown,” the agency said.
There are 54 NBFC-MFIs in the country with about 5.6 crore microfinance borrowers. Indian microlenders have a total loan book of Rs2.16 crore out of which NBFC-MFIs have Rs 73,000 crore. The average loan ticket size is Rs 31,000 crore. The COVID-19 lockdown may erode up to 25 percent of the annual collections of NBFC-MFIs, the industry fears. This is significant for microlenders since the average loan tenure of NBFC-MFI borrowers is just 18-24 months. For banks, this is much longer. The liquidity vacuum thus created will hit these companies hard. MFIs borrow money at about 10-12 percent from banks and charge about 23 percent interest rate from borrowers. These entities collect payments in cash.