RBI’s TLTRO 2.0 fund allocation may disappoint smaller MFIs, NBFCs yet again

The detailed guidelines issued by the Reserve Bank of India (RBI) on the deployment of TLTRO 2.0 (targeted long term repo operations) funds indicate that smaller microfinance institutions (MFIs) and non-banking finance companies (NBFCs) may not receive adequate funds. These measures may not benefit smaller firms in the desired manner.

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.

The problem here is that in earlier rounds some of the big NBFCs, those with assets above Rs 500 crore, had already managed to secure funds from banks. 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.

The problem is exacerbated for smaller NBFC-MFIs since banks are reluctant to extend moratorium facilities to these companies. At the same time, these firms need to extend the moratorium facility to their borrowers. This scenario has created a short-term liquidity issue for smaller NBFC-MFIs.

The smaller MFIs and NBFCs desperately need funds since their collections have stopped. Every month during the moratorium, these companies are losing 8-10 percent of the collections. The average tenure of their loans is 18-24 months.

To make sure banks also lend to small companies after borrowing funds from RBI under the newly announced TLTRO window, the central bank said 50 percent of these funds should be mandatorily invested in microlenders and NBFCs. RBI said it is launching a Rs 50,000 crore TLTRO to begin with, indicating that more tranches will be introduced depending on demand.

In the first round of TLTRO, announced by the RBI on March 27 for up to Rs 1 lakh crore, big top rated companies such as NTPC, National Housing Bank (NHB) and Reliance Industries had received most of the money as banks preferred to stick to AAA rated companies. This created problems for smaller companies in terms of liquidity availability. This is why RBI has laid a condition in this round.

Explaining the rules, the RBI said investments made under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of the total investment permitted to be included in the HTM portfolio. Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF), the RBI said. The first auction under TLTRO 2.0 will be conducted on April 23.