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RBI’s lockdown measures to provide short-term liquidity support to NBFCs, HFCs, MFIs: Experts

The RBI’s move would to some extent enable NBFCs to raise funding and roll over their loan obligations.

Written by Sunny Verma | New Delhi | Updated: April 17, 2020 4:14:57 pm
RBI, coronavirus, India lockdown, COVID-19, cash hoarding, money withdrawl, indian express news Data from the Reserve Bank of India shows that the average monthly increase in currency with public stood at Rs 23,895 crore. During 2019-20, the currency with public increased 14 per cent or Rs Rs 2,86,741 crore to Rs 23,41,851 crore.

Measures announced by the Reserve Bank of India (RBI) Friday would provide significant short term liquidity support to Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs) and Micro Finance Institutions (MFIs), according to market participants.

The RBI’s move mandating banks to invest funds raised through targeted long-term repo operations (TLTRO 2.0) in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, alongside the decision to provide a Rs 50,000 crore refinance facility, would to some extent enable NBFCs to raise funding and roll over their loan obligations.

Meanwhile, modifying its earlier guidelines, the government has also allowed NBFCs, HFCs and NBFC-MFIs to start operations with “bare minimum staff.” A source said this would be especially beneficial to MFIs as they can start their disbursement and recovery operations, which were halted during the lockdown period, while many NBFCs and HFCs were able to operate through digital channels.

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Industry sources said the central bank has left it to the discretion of commercial banks whether they will provide moratorium on loans to NBFCs. This relief will depend upon negotiations between the banks and NBFCs. “In order for NBFCs and MFIs to get enough liquidity provision an additional window or TLRTO 2.0 of Rs 50,000 crore was also announced exclusively for banks investing in investment grade papers such as bond and CPs issued by NBFCs and MFIs. This will in turn ease the liquidity problem faced by NBFCs and MFIs to some extent, if their lender bank does not provide moratorium on payment of instalment and interest which they are extending to their customers. It is thus left to the discretion of the individual bank to consider,” said Aadhar Housing Finance MD and CEO Deo Shankar Tripathi.

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The refinance window opened by the RBI will enable HFCs to get additional funds at lower rates. The RBI said it will provide special refinance facilities for a total amount of Rs 50,000 crore to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB) to enable them to meet sectoral credit needs. This will comprise Rs 25,000 crore to NABARD for refinancing regional rural banks, cooperative banks and MFIs); Rs 15,000 crore to SIDBI for on-lending/refinancing; and Rs 10,000 crore to NHB for supporting HFCs. Since the RBI will provide this refinancing at 4.4 per cent repo rate, it is expected that these entities be able to lend at a cost lower than the market rate.

“Recent measures announced by the RBI… could provide some solace to the NBFCs & HFCs, however, the sector continues to stare at asset side challenges which are expected to mount going forward after the moratorium period is over,” CARE Ratings said in a report Friday.

The central bank’s decision to cut reverse repo rate — the rate at which RBI borrows short term funds from bank — by 25 basis points will discourage banks from parking surplus funds with the RBI and channelise that towards lending to NBFCs bonds and commercial papers, bankers said. “Reverse Repo rate has been cut by 25 basis so that the corridor now becomes 90 basis. The system has roughly 7 trillion of excess liquidity that are parked at RBI’s reverse repo window. Today’s cut is a disincentive to overnight investments and should find way into credit,” said Lakshmi Vilas Bank’s Head (treasury department) RK Gurumurthy.

The RBI has also provided NBFCs the flexibility regarding to asset classification treatment of loan on which moratorium relief has been availed, thereby providing them similar NPA relaxation as was given to commercial banks. Even for loans given by NBFCs to commercial real estate (CRE) sector, the RBI has permitted that the date for commencement for commercial operations (DCCO) for such CRE projects delayed for reasons beyond the control of promoters can be extended by an additional one year, over and above the one-year extension permitted in normal course, without treating the same as restructuring.

Since the real estate sector is one of the most affected by the impact of Covid-19 and companies operating in this segment are highly leveraged, this will provide relief to NBFCs in terms of their exposure of commercial real estate facing difficult in repayments.

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