NBFCs Could Continue To Face Financing Pressures, Cautions RBI Paper
Liquidity pressures will remain elevated for India’s non-bank lenders even though regulatory measures have helped ease market conditions considerably.
A paper authored by RBI staffers, published in its June 2020 bulletin, said despite interventions by the central bank and the government, there is still stress in the NBFC system.
“This appears to suggest that the problem is not just of liquidity but, possibly, of expectations of deterioration in credit quality on account of Covid-19 related disruptions,” the paper said.
As such, non-bank financial companies may continue to face headwinds in terms of meeting funding requirements through market borrowings, even though these companies have shifted towards bank borrowings.
The emerging developments indicate a need for policy interventions, which go beyond liquidity-related measures to credit-related ones. There is a need for ensuring flow of credit/liquidity to NBFCs with concrete credit backstop measures to address the risk aversion in the system, bridge the trust deficit and restore confidence.RBI Paper (Monthly Bulletin - June 2020)
To build a more sustainable funding environment for NBFCs, the paper said there is a need for a credit risk transfer mechanism such as an active credit default swap market for the corporate bond market.
“Introduction of the legislation on bilateral netting could provide a fillip to the CDS market,” it said.
The RBI also cautioned that there are significant redemptions coming up for NBFCs.
- The outstanding borrowings for the top 100 NBFCs from the commercial paper markets and bond marks stood at Rs 12.6 lakh crore at the end of April 2020.
- Around Rs 1.08 lakh crore worth of debt securities, or 9% of the outstanding market borrowings, will mature in the next three months.
- Another Rs 1.6 lakh crore, or 13.4% of outstanding market borrowings, are falling due for repayment in the following nine months.
Some NBFCs could face challenges in rolling over or re-financing the redemption requirements at competitive rates, the paper said. As NBFCs and housing finance companies have extended a moratorium to their borrowers, in addition to risk-aversion in the funding environment, there could be an impact on cash flows for the sector as a whole, it said.
Impact Of TLTRO Funds
In the wake of the Covid-19 outbreak, the RBI provided Rs 1 lakh crore in long-term liquidity to banks, with the intention that these funds would go towards investing in primary and secondary market bond issues. Another Rs 50,000 crore was offered specifically for investment in NBFC paper, of which about half was utilised.
“TLTROs had a salutary impact on the market. In response to these auctions, there was a significant uptick in the corporate bond market and a moderation in the liquidity pressures faced by various entities, including NBFCs,” the paper said.
The bulk of the benefit of the TLTROs accrued to higher rated entities, with AAA-rated corporate and public sector undertakings accounting for most commercial paper and bond issuance between March and April 2020, it said.
The share corporate bond issuance by private NBFCs fell to 5% in April from 26% in February, whereas in the commercial paper market private NBFCs accounted for 9% of issuances in April compared to 16% in February.
The TLTRO facility, however, has softened the the weighted average yield on bond issuances in April across buckets, expect for bonds maturing between seven and 10 years.
The TLTRO funds had little impact on CP issuances as firms preferred to raise “longer tenor bonds and lock-in the lower rates for a longer time to avoid roll-over risks,” the paper said.
Yields on CPs for AA-rated corporates eased by 96 basis points, while yields for lower rated entities softened by only 20 basis points between January and April 2020, it said.