Smaller NBFCs May See Limited Relief From RBI’s TLTRO 2.0
Smaller non-bank lenders and microfinance firms may see limited relief even after the Reserve Bank of India tweaked rules for the upcoming second round of targeted long-term repo operations.
TLTRO 2.0, announced by RBI Governor Shaktikanta Das on Friday, is designed to channel funds to non-banking financial companies via banks. The central bank will offer Rs 50,000 crore through this facility, with half of that amount being set aside for small- and medium-sized NBFCs and microfinance institutions.
On Tuesday, RBI specified that banks will get 45 days to invest the funds raised under TLTRO 2.0. It also said the funds can be used to invest in securities issued by NBFCs and MFIs in the primary or secondary market.
In addition, the RBI said the amount raised via TLTRO 2.0, which is invested in MFIs and smaller NBFCs, can be excluded while calculating adjusted non-food bank credit, which is used as a base for calculating priority sector lending.
The auction for the Rs 50,000 crore T-LTRO 2.0 funds will take place on April 23, according to the banking regulator.
The clarifications will help but may not go far enough to counter the risk aversion in the system, which is preventing a flow of liquidity to NBFCs, said Raman Agarwal, co-chairman of Finance Industry Development Council, an industry body.
While it is good that the RBI has clarified the conditions, it does not provide much of an incentive since banks are still risk-averse to invest in bonds of smaller NBFCs, Agarwal said.
“Since the IL&FS crisis, the RBI has been providing liquidity to the banking system expecting that money will flow to NBFCs. It is high time the NBFC sectors’ over-dependence on bank funding is corrected, through a refinancing window, which can be temporary, through the RBI or a dedicated window through another agency like SIDBI, NABARD or MUDRA,” he said.
Sharpening The Target Under TLTRO
TLTRO 2.0 differs from the first round of such operations announced by the RBI in March. While in the previous round, banks had a wider choice of securities to invest in, this time the central bank has specified certain targets.
Of the Rs 50,000 crore provided under TLTRO 2.0:
- 10 percent has to be invested in instruments and securities issued by MFIs.
- 15 percent in debt securities by NBFCs with an asset size of Rs 500 crore and below.
- 25 percent in debt securities of NBFCs with an asset size between Rs 500 crore and Rs 5,000 crore.
According to India Ratings and Research, most NBFCs with an asset size of between Rs 500 crore and Rs 5,000 crore have a credit rating of A or BBB, whereas a large number of NBFCs with a balance-sheet size of less than Rs 500 crore don’t have investment grade credit ratings.
“It could be even more challenging for NBFCs with a balance sheet size of less than Rs 500 crore, especially as a large number of these would not be rated in the investment grade,” the rating agency said in a April 20 report.
Pankaj Naik, associate director at India Ratings, said smaller NBFCs mainly lend to micro-small-medium enterprises and individuals who have seen cash flows impacted due to the lockdown. “In this environment when delinquencies are expected to rise for NBFCs, banks taking an additional exposure on these entities remains to be seen,” he said.
In its report, India Ratings said that NBFCs would face a difficult choice deciding the quantum of liquidity they wish to raise and the cost at which these funds will be provided. This means that many small NBFCs, that are facing liquidity pressures, may be forced to borrow at a higher rate which in turn will impact their spreads, it said.
In an April 19 report, Emkay Global Financial Services said that given the liquidity crunch during the moratorium period of three months, the overall funding requirement for NBFCs would be close to Rs 2 lakh crore assuming average maturity of five years.
“The liquidity available through the LTRO window is negligible compared to the actual liquidity crunch in the system,” the report said, adding that the RBI may be required to infuse further liquidity at regular intervals in order to avoid any systemic issues.
Interest From PSU Banks, SFBs
Vibhor Mittal, chief product officer of Vivriti Capital, said state-run banks and small finance banks that work in the microfinance segment may raise funds under TLTRO 2. However, interest from private banks may remain muted.
He added that this assessment was based on market feedback prior to the RBIs FAQ published on Tuesday.
“Given that these investments will now not be included under adjusted non-food bank credit for bank priority sector lending targets, it may help,” Mittal said. “However, the funding benefit will depend on the banks’ risk-assessment of the NBFCs in each bucket (NBFC-MFI, NBFCs with assets of less than 500 crore, and entities with assets between 500 to 5000 crore) in this environment.”