Small NBFCs continue to struggle for funds despite RBI’s liquidity push

NBFC (PC-Shutterstock)

Banks continue to be hesitant to lend to small nonbanking finance companies even after a nudge by the Reserve Bank of India to push credit to this segment. The central bank and the government had announced several schemes to prod banks to lend more to these NBFCs.

NBFCs source funds mainly from banks and the markets to lend at a margin. However, only highly-rated, large NBFCs can raise money at cheaper rates from the markets. There are not many takers for small and low-rated NBFCs.

What did the RBI do?
In the wake of the pandemic, the RBI announced measures to ensure liquidity availability in the market. Some of these were through targeted long-term repo operations (TLTRO) while the government, as part of the economic package, announced a partial credit guarantee scheme and special liquidity schemes to help NBFCs.

In one such scheme announced last year, the central bank said 50 percent of the funds should be mandatorily invested in microlenders and NBFCs. But the schemes haven’t helped the small NBFCs.

“For smaller NBFCs, bank funding continues to be a problem area,” said Raman Agarwal, area chair – NBFCs, at the Council for International Economic Understanding. “You may create provisions but unless there is some mandate involving banks, banks won’t be forthcoming to lend. Only around 25 per cent of the RBI facility (through TLTRO) was used and very little portion reached smaller NBFCs.”

Why are banks not lending?
“There are different reasons why banks are not lending to smaller NBFCs,” said the head of a large NBFC who didn’t want to be identified, fearing the wrath of banks. “These reasons differ from company to company.”

One reason, the official explained, was that many small NBFCs do not have the required credit rating (minimum investment grade) or are too small to get a rating. In most of the schemes announced by the RBI or the government, banks are required to lend to NBFCs with the minimum rating. This rule makes many NBFCs ineligible to get bank funding.

Secondly, banks typically have lending limits that are based on the asset size of the borrowers. The small NBFCs may not have adequate room for further borrowing.

“If you are a small NBFC, your eligibility limit will be already low. Banks would not want to increase lending limits to weaker or smaller NBFCs at the time of a pandemic,” said the official.

Thirdly, banks turned highly risk-averse towards NBFCs in the aftermath of the Infrastructure Leasing & Financial Services and Dewan Housing Finance Corporation crises in 2018. Since then, funding for NBFCs has improved but the pandemic worsened the situation.

Covid-19 impacted the collection efficiency of all NBFCs, including the larger ones. The impact was severe on vehicle loans and consumer loans. NBFCs that faced asset quality pressure included Bajaj Finance (auto loan NPAs of 19.15 percent against 9.31 percent in the March quarter of FY21 and 5.8 percent a year earlier.

Who will lend to smaller NBFCs?
With none of the measures benefiting them, there is a view that the RBI must create a dedicated fund that can be routed to smaller NBFCs through organisations like the National Bank for Agriculture & Rural Development or the Small Industries Development Bank of India, said Agarwal.

“That seems to be the only way,” Agarwal said.
According to a second official, NBFCs are talking to lenders to do away with the minimum credit rating requirement for smaller borrowers.

“Larger NBFCs could lend to smaller NBFCs and bridge the gap of bank funding,” said the official.

Bank lending to NBFCs was at Rs 8.9 lakh crore as of July 30, 2021, little changed from Rs 8.87 lakh crore on July 31, 2020, according to RBI data.