Recent Notifications Regarding NBFC, Made by Our Hon’ble Union Finance Minister Nirmala Sitharaman
By gkkedia Dt. May 15th, 2020
We are G.K. Kedia and Co, and today we are sharing the key takeaways from the recent notifications regarding NBFC, that is made by our hon’ble Union Finance Minister Nirmala Sitharaman on 13-May-2020 as part of the government’s package to boost the economy that has slowed down due to the Covid-19 pandemic.
- Targeted longer-term repo operations (TLTRO) of Rs.50,000 crore for investing them in investment-grade bonds, commercial paper, and non-convertible debentures of NBFCs. Under this Bank is required to invest 50% of the fund in small and mid-sized NBFCs.
- For loans by NBFCs to commercial real estate sector, additional time of one year has been given for extension of the date of commencement of commercial operations (DCCO).
- A Rs 30,000 crore Special liquidity scheme. Under this scheme, the investment will be made in both primary and secondary market in investment-grade debt papers of Non-Banking Finance Companies (NBFCs), housing finance companies (HFCs) and microfinance institutions (MFIs). “We have been hearing that NBFCs were not able to get enough resources despite efforts from government and RBI, especially those which were particularly not highly rated,” the finance minister said. The scheme will supplement the Reserve Bank of India and government measures to augment liquidity by providing a guarantee to investment-grade securities, adding this will provide liquidity support for NBFCs/HFCs/MFIs and mutual funds and create confidence in the market.
- A Rs 45,000 crore liquidity infusion through a Partial Credit Guarantee Scheme (PCGS) 2.0 for Non-Banking Financial Companies (NBFCs). The scheme is designed to boost NBFCs, HFCs, and MFIs with low credit ratings that require liquidity for fresh lending to Micro, Small and Medium Enterprises (MSMEs) and individuals.
The existing PCGS scheme will be extended to cover borrowings such as primary issuance of bonds/CPs of such entities. Under the scheme, the first 20% of the loss will be borne by the government which will be the guarantor. The scheme is expected to result in the liquidity of Rs 45,000 cr. In the last few years, NBFCs have been struggling with bad assets and corporate governance issues.
AA paper and below including unrated paper eligible for investment (esp. relevant for many MFIs) This scheme will result in the liquidity of Rs 45,000 crores. This was to help address temporary liquidity or cash flow mismatch issues of otherwise solvent NBFCs or HFCs without them having to resort to distress sale of assets for meeting their commitments.
But there is a catch for smaller NBFCS/ MFIs here. Since these special liquidity facility loans are not exclusive to MFIs or smaller NBFCs, the weaker ones in the lot will still be last in the queue for funds. The scheme is open to NBFCs, MFIs, and HFCs. So, ultimately it is still up to the banks whether to pass on these benefits or not. Banks will naturally choose the bigger companies rather than low-rated firms.
One should wait and watch how banks will respond this time. Only if banks choose to lend to smaller MFIs and NBFCs following the cues from the government in letter and spirit, the benefit of Sitharaman’s package will reach the bottom. To sum up, the government has addressed a long-standing problem of smaller NBFCs, MFIs, and MSMEs—banks’ high-risk aversion. The ball is in banks’ court now.