The non-banking financial companies (NBFC) sector has played a critical role in India’s growth. It has fuelled demand and consumption in industries such as consumer durables, automobiles and housing. Further, it provides the last-mile connect to the MSME entrepreneurs and also fosters growth at the bottom of the pyramid by financing the varied needs of the populace. According to industry estimates, NBFCs lend close to 20% of all credit in India. They have traditionally contributed to 35% of all new lending.
Given the depth and breadth of reach of the NBFC sector, the government looks upon it as a valuable ally in our nation’s economic recovery journey.
Over the last two months, the policymakers have sought the sector’s assistance at various instances:
- Under the direction of the Reserve Bank of India (RBI), NBFCs have offered a six-month moratorium, ending on 31 August 2020, to lakhs of households. This facility provides much-needed relief against paying instalment dues immediately.
- As a part of the Special Liquidity Scheme under the Atmanirbhar Bharat economic package, NBFCs, HFCs and MFIs have been allotted a package of INR 30,000 crore to help those finding it difficult to raise money in debt markets.
- The government is enabling last-mile credit delivery to MSMEs by allowing NBFCs to give loans which have a 100% guarantee cover from Government of India.
The steps taken by policymakers have significantly alleviated the stress of borrowers. However, in serving other sectors, NBFCs themselves are faced with several risks. The environment of greater risk sensitivity and higher risk aversion has made financing conditions challenging. Further, the industry is facing a liquidity crunch after banks were hesitant to extend the benefits of loan repayment moratorium to NBFCs.
Taking cognisance of the situation, the government recently announced relief measures to improve the market financing conditions for the sector. These include:
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A Special Liquidity Scheme worth INR 30,000 crore:
Under this scheme, a Special Purpose Vehicle (SPV) would be set up to manage a Stressed Asset Fund (SAF) whose special securities would be guaranteed by the Government of India and purchased by the Reserve Bank of India (RBI) only. The proceeds of the sale of such securities would be used by the SPV to acquire short-term debt of NBFCs/HFCs.
As the Cabinet noted in the press release announcing this scheme, “The scheme would also act as an enabler for the NBFC to get investment grade or better rating for bonds issued. The scheme is likely to be easier to operate and also augment the flow of funds from the non-bank sector.”
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Modification of the Partial Credit Guarantee Scheme:
As per the modified terms of the scheme, a sovereign guarantee of up to 20% of first loss will be provided to state-owned banks for purchase of bonds or commercial papers of NBFCs, MFIs and HFCs having a credit rating of AA or below, including unrated paper with an original maturity of up to one year.
As a government statement noted, “The extended scheme addresses temporary liquidity or cash flow mismatches of otherwise solvent NBFCs/HFCs/MFIs without having to resort to distress sale of their assets for meeting their commitments and to enable availability of additional liquidity to them for on-lending.”
These measures improve market financing condition and facilitate bank credit to NBFCs. They supplement the steps announced by the RBI a couple of months ago. However, while these schemes are noteworthy and supportive, they may not be sufficient to bolster the sector performance. As per an estimate by the RBI, INR 1.08 lakh crore of total outstanding market borrowings of NBFCs will mature within the next three months. Another Rs 1.6 lakh crore will be due for repayment in the following nine months.
The stress facing the sector is not just a result of liquidity crunch but also due to deterioration in credit quality on account of COVID-19 related disruptions. Against this backdrop, the RBI has noted the need for:
- Policy interventions, which go beyond liquidity related measures to credit-related ones.
- Ensuring the flow of credit/liquidity to NBFCs with concrete credit backstop measures to address the risk aversion in the system.
- Standardised valuation of corporate bonds
- Diversification of investor base and increased participation by long-term investors
- Credit risk transfer mechanism in the corporate bond market through an active credit default swap (CDS) market.
The RBI’s observations are accurate and comprehensive. As an industry stakeholder, I find it reassuring that the government and the apex bank are working hand-in-hand to alleviate the sectoral stress. I’m hopeful that India’s NBFC sector will emerge more robust and resilient from the COVID-19 crisis.
