Liquidity crisis with non-banking finance companies (NBFCs)

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Will Indian NBFCs Survive The Ongoing Liquidity Crisis?

April 24, 2020 by Souvik under FinTech1,429 views
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In an attempt to stem the liquidity crisis widely anticipated in the wake of the Covid-19 pandemic, Non-Banking Finance Companies (NBFCs) have requested a funding lifeline from banks.

NBFCs primarily service Micro, Small and Medium Enterprises (MSMEs). They also cater to the real estate and infrastructure sectors, both of whom have been hurt by the pandemic.

On behalf of the NBFCs, FICCI has written to banks asking for a line of credit. It has also asked for a substantial allocation of the Targeted Long-Term Repo Auction (TLTRO) from the Reserve Bank of India for the sector.

In a letter to the Indian government regarding NBFC funding requirements, FICCI proposed a two-fold relief to the sector. One was an amount of 10 percent of the total borrowings as refinance against the existing non-convertible debentures (NCDs) that are listed and are held by the housing finance companies and the NBFCs.

The other was a 10 percent loan by banks under an umbrella Covid-19 program.

The RBI is in talks to conduct TLTRO of Rs. 1 lakh crore. Banks that avail liquidity under this scheme will be required to deploy said liquidity in NCDs, commercial paper and corporate bonds that are investment grade.

This will be in addition to their investments in these bonds outstanding as on 27th Mar, 2020.

The 2020-21 Union Budget Did Not Help

The Union Budget for this financial year failed to provide any reprieve to the ailing Housing Finance Companies (HFCs) and NBFCs.

The markets were hopeful that, as a continuation of the relief measures announced in Sep 2019, additional policies would be announced to alleviate the challenges of the shadow banking sector.

Unfortunately, other than online bill discounting platform and debt recovery system access, NBFCs did not have much to cheer about.

In the 2019-2020 budget, the government had called for a partial credit guarantee (PCG) scheme that would help the NBFCs tackle the liquidity crisis. Unfortunately, the scheme, which was launched in Aug 2019, succumbed to a series of roadblocks.

Later on, the scheme was modified to take into account industry feedback. In 2019 December, the cabinet extended the PCG scheme to 30th Jun, 2020. Furthermore, another 3 months were added as extension buffer subject to the progress made.

Banks could now purchase NBFC assets that were rated BBB+. This widened the scope from the hitherto stipulation of AA-rated assets only. NBFCs that had fallen into the SMA-0 category a year before the IL&FS crisis would also come into play.

During the budget session on 1st Feb 2020, the Indian Finance Minister Nirmala Sitharaman said that a mechanism would be devised to deploy the scheme without sharing any additional details.

In its report, the credit rating agency Care Ratings observed that clarity regarding the mechanism was required which would be forthcoming soon.

Cautious Optimism

According to the RBI Governor Shaktikanta Das, India’s shadow bank sector has shown signs of improvement with only a handful of institutions that would give cause for worry.

Earlier, the RBI had been closely monitoring around 50 companies that had shown signs of stress. This number was now down to just 3 or 4. The RBI would never let any major financier or bank to collapse, said the Governor.

According to Das, funding to the NBFC sector has improved significantly, reducing the liquidity crisis greatly.

Indian shadow banks lend across the board, from real estate tycoons to blue-collar business owners. In 2018, the industry suffered the collapse of infrastructure financier Dewan Housing Finance Corp and has been trying to recover ever since.

One of the biggest shadow lenders in India, Infrastructure Leasing and Financial Services Ltd., defaulted in 2018, setting off the liquidity crisis in the industry.

In Feb 2020, RBI released USD 14 billion worth of cheap funds so that banks could lend more. Lenders no longer have to set aside cash for new loans that are extended to small businesses, residential housing and retail automobiles.

Furthermore, the central bank has also loosened the lending rules for SMEs. Certain delays in loan servicing will no longer be treated as bad debt.

However, the time is never suited than ever before for NBFCs to look at data engineering and automated platforms to offer some value-add loans to existing members. There is a huge need in the market and if you know customers well you can always them a value add. At INT, we have worked closely with banks and create automated platforms to improve decision making and disbursing financing without doing any major changes to their core IT infrastructure.

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