RBI’s Loan Moratorium Extension May Bring More Pain For NBFCs
The Reserve Bank of India’s decision to extend a moratorium on loan repayments until Aug. 31 may end up bringing more pain for the country’s non-bank lenders.
The moratorium, first announced in March, allows term loan and working capital borrowers to defer their repayments. All lenders have been allowed to offer the moratorium to their borrowers as per a board-approved policy.
The first phase of the moratorium has seen about a third of private bank and NBFC loan books go under moratorium. While the relief helps banks immediately, for non-bank lenders, the moratorium has proved to be a double-edged sword. Banks have been selective in granting moratorium to NBFCs, complicating liquidity management for the latter.
NBFC vs Banks: The NBFC View
Executives at non-bank lenders that BloombergQuint spoke with say there is no single strategy across banks on how to deal with NBFC moratorium requests.
In a conversation with BloombergQuint earlier this week, Rashesh Shah, chairman of the Edelweiss Group, said that banks prefer to sanction fresh credit lines to NBFCs to help them meet their liquidity requirements rather than offer them a moratorium.
The way it is working is that first you repay banks from your reserves and the fresh funding will help replenish the reserves.Rashesh Shah, Chairman, Edelweiss Group
This view was mirrored by the head of an affordable housing finance company, who spoke on conditions of anonymity. According to him, large lenders like State Bank of India, HDFC Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd. chose to extend emergency credit lines to meet liquidity requirements of NBFCs rather than deferring repayments. These lines are available to well-rated NBFCs, where banks are comfortable lending.
A senior executive at a smaller retail lending-focused NBFC also said that banks are more comfortable extending fresh credit lines. He, however, said that the lack of liquidity is filtering through the system since larger NBFCs also lend to smaller NBFCs.
To be sure, not all NBFCs have even sought a moratorium. A senior executive at a gold loans firm said that it had avoided seeking repayment relief due to the implications on perceived asset quality.
Over the past week, the government and the RBI have stepped in with special liquidity facilities for NBFCs. The Finance Industry Development Council, an industry body, however, sees them as inadequate.
In a recent letter by the council, it has sought that the government-approved special purpose vehicle should be allowed to purchase NBFC debt instruments with a tenure of up to three years, as compared with three months right now. FIDC has also sought that the partial credit guarantee be extended to loans and debt instruments up to three years.
Watch Rashesh Shah explain the NBFC conundrum:
NBFC vs Banks: The Bank View
Bankers seem to take a different view and believe NBFCs have adequate support.
State Bank of India Chairman Rajnish Kumar, speaking on Friday, said the lender would extend the moratorium to NBFCs on a case-to-case basis, after reviewing their respective financial positions.
We must keep in mind that many NBFCs are seeing an improvement in their collections. There are also measures announced by the government and the RBI to provide NBFCs with required liquidity. The policy measures should take care of NBFCs.Rajnish Kumar, Chairman, State Bank of India
Bankers who spoke with BloombergQuint said that large NBFCs, which account for nearly three-fourths of loans given out by non-bank lenders, are receiving the support they need from the banking sector.
The head of wholesale lending at a large private sector bank said that the banking industry has been providing emergency credit lines to the NBFC industry as a way to meet liquidity needs where necessary. Allowing NBFCs a moratorium on repayments would only lead to accumulation of dues, which could make the debt unsustainable, the private banker said.
The chief executive of another public sector bank added that most large NBFCs and HFCs have been able to meet their repayment obligations so far as they had completed their March-quarter collections before the RBI announced the moratorium. However, some of these companies may have to opt for deferment of repayments now if the moratorium on borrowers extended for another three months.
Watch Rajnish Kumar explain the bankers view:
What Analysts Say
The loan moratorium extension is a major negative for all NBFCs as this would further delay the overall collection and recovery procedure, and stretch the total liquidity cycle for all, said Emkay Global in a report.
“There is no clarity yet over moratorium extension for NBFCs from banks. Most of the large NBFCs stayed away from opting for moratorium; however, we think they also need to change stance over this. Hence, confusion multiplies now,” the brokerage house said.
Motilal Oswal in a note said that the moratorium is a mixed bag for NBFC and will lead to a period in which conservation of liquidity will be key.
“While moratorium granted on loans varies from 20% to 100% across NBFCs, the moratorium provided to NBFCs from banks is negligible. This is likely to result in a cash flow mismatch for NBFCs. As a result, NBFCs would focus on conserving liquidity to honor payments,” the brokerage house said.
Liquidity challenges for NBFCs, HFCs and microfinance companies may get accentuated if banks don’t the extend moratorium to them, said Krishnan Sitaraman, senior director at Crisil Ratings. “With extension in the moratorium to be offered to borrowers, their asset side cash flows would continue to be impacted. Further, it is not expected that they will get any moratorium on their capital market debt repayments.”
Sitaraman added that the recent guarantee schemes will alleviate the concerns somewhat but extension of a moratorium to NBFCs would be key.