SMEs to gain maximum from Rs 1-trn RBI liquidity boost to NBFCs, HFCs

Apart from the new TLTRO window, the RBI has also opened another Rs 500 billion in refinancing window for Nabard, Sidbi and NHB. Photo: Sanjay K Sharma
Small businesses will benefit the most from the Rs 1 trillion targeted liquidity boost to small and mid-sized non-banking lenders, housing financiers and micro-lenders, say the shadow banking industry leaders.

Non-banking financial companies (NBFCs), housing finance companies (HFCs) and micro-finance institutions (MFIs) -- which have been starved of finances ever since IL&FS went belly up after large-scale fraud and mismanagement by top management came to light in September 2018 -- have finally heaved a sigh of relief after the Reserve Bank on Friday opened two durable liquidity windows worth Rs 1 trillion for them.

The latest measure has come as two of its most innovative liquidity measures worth Rs 2 trillion since February 6 did not elicit the desired effect.

On Friday in the second Covid-19 booster dose, the RBI announced a new TLTRO, under which it will pump in Rs 500 billion,into the system and made it mandatory for banks to invest 50 percent of the money in lower-rated debt being issued by small and medium NBFCs, HFCs and MFIs.

Apart from the new TLTRO window, the RBI has also opened another Rs 500 billion in refinancing window for Nabard, Sidbi and NHB.

While the Rs 1 trillion LTRO announced on February 6 was not targeted at any particular segment, the similar amount of TLTRO announced on March 27 was targeted at the debt market with a similar mandate of investing 50 per cent of the funds in corporate bonds.

But where the objective failed to meet the regulatory purpose was that the risk-averse banks chose to pick only AAA-rated debt and unnecessarily benefitting deep pocket corporates.

The NBFC/HFC/MFI industry has wholeheartedly welcomed the move saying the TLTRO 2.0 will ensure broader liquidity transmission into the NBFC sector, which ultimately will benefit SMEs/MSMEs the key segment of the economy that is the most fund-starved.

Siddhartha Mohanty of LIC Housing Finance said the 25 bps reverse rate cut to 3.75 per cent will minimise the epidemiological damages due to coronavirus. Along with the 25 bps cut in the reverse repo rate, the NPA reclassification to exclude the lockdown period are welcome measures, he added.

"These steps are a much-needed breathing space for the small borrowers and small shadow banks and help them tide over the unexpected financial and psychological jolt from the pandemic, Mohanty told PTI.

Harsh Shrivastava of MFIN also welcomed the move, saying the RBI has finally acknowledged our concerns as a substantial portion of the Rs 500 billion liquidity infusion will help small & medium players, which in turn will support the bottom of the pyramid customers.

Shachindra Nath of the small-sized lender Ugro Capital said the fresh liquidity measures will ultimately help SME borrowers.

The ultimate beneficiary of these decisions are SMEs which fulfill their working capital requirement from the mid-level and small-level NBFCs, especially if the focus of such measure is to ensure liquidity support to NBFCs looking to raise debt capital for lending as opposed to those that need capital to meet liquidity shortfalls," Nath said.

Rakesh Singh of Aditya Birla Finance said the TLTRO 2.0 will help small and mid-sized NBFCs remain adequately liquid and stable and continue to function normally and thus help small borrowers. Similarly, the refinance facilities of Rs 50,000 to NHB, Sidbi and Nabard will give the necessary impetus to HFCs.

Welcoming the RBI announcements, Vishal Kampani of JM Financial Group said these measures signal a strong intent of the RBI to turn the wheel of the economy.

The 25 bps reverse repo rate cut will prompt banks to increase lending, leading to a broader liquidity transmission to NBFCs. But banks need to ensure that credit transmission to NFBCs take place regardless of the credit-ratings, he said.

Sanjay Chamria of Magma Fincorp said NBFCs will benefit from the standstill on overdue instalments and from the new liquidity window. We also hope banks now give a moratorium to NBFCs and HFCs since they have already allowed moratorium to their own customers," he said.

George Alexander Muthoot of Muthoot Finance said through the new TLTRO, we expect liquidity challenges to ease while the reverse repo rate cut will motivate banks to lend more".

Shriram Transport Finance's Umesh Revankar feels the new liquidity windows are a big relief to NBFC borrowers and urged banks to offer NBFCs a moratorium to manage cash flow smoothly.

Jaspal Bindra of Centrum Group said, "RBI has shown pragmatism in announcing the second round of measures, aimed at maintaining liquidity and incentivising credit flows to small NFBCs and HFCs."

The new TLTRO will help NBFCs and MFIs. Similarly, relief packages of Rs 500 billion for Nabard, Sidbi and NHB combined with the reverse repo cut will incentivize banks and NBFCs to step up their lending activities and which in turn will help small borrowers and small companies.

Meghna Suryakumar of Crediwatch said the cut in reverse repo to 3.75 per cent is expected to help in credit off-take and the special refinance package is further expected to infuse liquidity to small agriculture-driven businesses and low-income housing.

"Tourism Finance Corporation of Anirban Chakraborty said the RBI measures provide the much-needed liquidity to small NBFCs, MFIs and SMEs. Further, the Rs 500 billion refinancing window is a big help at hiking liquidity to SMEs, he said.


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