The government has offered a much-needed lifeline to smaller non-banking finance companies (NBFCs) and microfinance institutions (MFIs) by offering partial to complete government guarantee to banks on loans given to these companies.
The signals are clear from Delhi; no bank can now refuse loans to small firms hit by the COVID-19 lockdown. Also, lenders can’t shut doors to low-rated or even unrated companies. The government is bearing the risk, not banks. But that said, banks can still spoil Sitharaman’s liquidity party by choosing the better ones from the lot.
To give a context, banks have so far declined to lend to smaller companies citing high credit risk. This is despite the significant liquidity boost from the Reserve Bank of India (RBI) in two rounds. That problem is now partly addressed with the government assuring full credit guarantee on Rs 30,000 crore special liquidity schemes for NBFCs with minimum investment grade.
Also, the Rs 45,000 crore partial credit guarantee scheme for NBFCs, including to unrated ones, is a major move. Th first 20 percent loss in these papers will now be compensated by the government.
In two rounds, the RBI has announced about Rs 5.2 lakh crore stimulus package. The first was on March 27 when it announced Rs 3.74 lakh crore worth liquidity measures and a steep 75 bps rate cut. The second was on April 17, when it announced another Rs 1.5 lakh crore liquidity measures. But despite all this, smaller companies have been ignored by banks. Banks are scared that the money lent to these companies will turn bad sooner or later.
Smaller NBFCs and MFIs constitute the majority in number. These companies have suffered a double whammy when banks declined to give loan moratorium as per the RBI announcements and COVID-19 impacted their operations. They may get a relief now. Apart from the liquidity boost to NBFC/MFIs, Sitharaman’s announcement of Rs 3 lakh crore worth collateral-free loans to micro, small and medium enterprises (MSMEs) will also benefit NBFCs since they are lenders to many MSMEs.
The collateral-free loans will carry a four-year tenure and have a full credit guarantee from the government and will have 12 months of moratorium. Approximately 45 lakh units will benefit from this scheme. Those firms with up to Rs100 crore turnover can avail this benefit, Sitharaman said. The Rs 3 lakh crore loan will benefit MSMEs hugely, and in turn, will have a positive impact on their lenders including NBFCs.
Also, with the investment limit revised upwards and the distinction between manufacturing and services removed, MSMEs now have more scope to grow. For government procurement, tenders up to Rs 200 crore will no longer be under global tender route. This is big benefit to MSMEs since they used to get disqualified in the race earlier.
But there is a catch for smaller NBFCS/ MFIs here. Since these special liquidity facility loans are not exclusive to MFIs or smaller NBFCs, the weaker ones in the lot will still be last in the queue for funds. The scheme is open to NBFCs, MFIs and HFCs. So, ultimately it is still up to the banks whether to pass on these benefits or not. Banks will naturally choose the bigger companies rather than low-rated firms.
One should wait and watch how banks will respond this time. Only if banks choose to lend to smaller MFIs and NBFCs following the cues from the government in letter and spirit, the benefit of Sitharaman’s package will reach the bottom. To sum up, the government has addressed a long-standing problem of smaller NBFCs, MFIs and MSMEs—banks’ high risk aversion. The ball is in banks’ court now.
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