Sitharaman gives liquidity boost of Rs 75,000 cr to shadow banks, MFIs

Under this scheme, investment will be made in both primary and secondary market transactions in investment-grade debt papers of NBFCs, HFCs and MFIs. Photo: Shutterstock
Finance Minister Nirmala Sitharaman on Wednesday provided a major liquidity boost of Rs 75,000 crore to shadow lenders and microfinance institutions (MFIs), which are struggling with cash-flow problems as banks have become risk-averse in lending to them.

Sitharaman announced a special liquidity scheme of Rs 30,000 crore for non-banking finance companies (NBFCs), housing finance companies (HFCs) and MFIs, which are finding it difficult to raise money from the debt markets. Under this scheme, investment will be made in both primary and secondary market transactions in investment-grade debt papers of NBFCs, HFCs and MFIs. And, all the debt papers bought through this special liquidity scheme will be guaranteed by the government.

“This will provide liquidity support for NBFCs, HFCs, MFIs, and mutual funds and create confidence in the market”, the finance minister said.

Earlier, the RBI had provided a corpus of Rs 50,000 crore via bids in the targeted long term repo operation (TLTRO 2.0), wherein banks would borrow money from the central bank at the repo rate of 4.4 per cent and invest in the debt papers of shadow lenders. However, the RBI received bids for only about half the Rs 25,000 crore it offered in the first trance, indicating that banks were reluctant to lend to NBFCs. Banks put in 14 bids worth only Rs 12,850 crore.

Second, the FM announced the government will extend the already in-force partial credit guarantee scheme (PCGS 2.0) to cover borrowings, such as primary issuances of bonds, commercial papers of NBFCs, HFCs, and MFIs, wherein the government will bear the first 20 per cent loss as guarantor for even unrated papers. This will enable another Rs 45,000-crore liquidity support to the shadow banking industry. Papers of lenders with credit rating AA and below will be eligible for investment under the scheme.

Among major announcements, the government said it will provide 100 per cent credit guarantee on the principal amount to lending institutions for extending credit to the MSME sector. Loans totalling Rs 3 trillion will be for four years with a moratorium on principal repayment of 12 months.

 “The move to support 100 per cent credit guarantee to the MSME sector will boost the confidence of banks and NBFCs in lending to the sector. The special liquidity scheme will ease liquidity issues of those NBFCs which are able to get some rating, while the first loss guarantee to subscribe to papers of even unrated NBFCs will help small lenders to get funds," said Ramesh Iyer, VC & MD, Mahindra & Mahindra Finance, and chairman of FIDC.

According to Deo Shankar Tripathi, MD & CEO of Aadhar Housing Finance, "Now banks with government guarantee will happily draw funds from the RBI and support low-rated companies. This measure will largely resolve the liquidity issues of these lenders”.

In the earlier partial credit guarantee scheme, public sector banks (PSBs) were encouraged to buy high-quality pooled assets of NBFCs up to Rs  1 trillion, for which the government would provide a one-time six-month partial credit guarantee for the first loss of up to 10 per cent. NBFCs and MFIs have welcomed the special liquidity scheme. However, for smaller MFIs, the problems remain. Most smaller MFIs are non-investment grade, and hence would not benefit from the scheme.

“In both schemes, we hope that smaller MFIs with less than investment-grade rating would not be overlooked," said P Satish, executive director, Sa-Dhan.

“This is a path-breaking move for the MFI sector. The credit loss in the sector is generally not more than 0.5 per cent. Against this, the government is giving 20 per cent guarantee. The larger point is that both RBI and government have understood that through MFIs, credit can reach 300 million customers," said Manoj Nambiar, chairman, MFIN.

Post the announcement of liquidity support, the spreads on corporate bonds are expected to shrink. This was also a longstanding demand of the industry and also banks, which hesitant to invest in NBFC papers in the absence of a guarantee by the government.

This time the facilities are for all bonds, including unrated ones, the ones that need liquidity support the most. Only about a handful of NBFCs are in the AAA category, most of the government entities. The AA category holds a sizeable chunk, but more than 70 per cent of India’s 10,000-plus NBFCs are rated A and below, mainly concentrated in the BBB or below investment grade rating, according to market intelligence.

NBFCs typically borrow between three-year and seven-year maturity from the corporate bond market. The spread between G-secs of five-year and an equivalent maturity AAA paper should be around 60-70 basis points in normal times. In times of stress, this spread has even widened to 90-100 basis points. 

However, the spread is now at about 120 basis points. For AA papers, the spread is now 185 basis points and for A-rated papers, the spread is now at 290 basis points, according to the data from FIMMDA (Fixed Income Money Market and Derivatives Association of India).

“This augurs well for the corporate bond market as a whole as the spread reduction in lower-rated NBFCs will have a positive rub off on better-rated NBFCs and we could see spreads of AAA-rated NBFCs and private corporate compress with regard to public sector unit issuers, which earlier was close to 100 basis points in the three-year segment,” said B Prasanna, head of global markets at ICICI Bank.

Apart from the measures announced by the government, the RBI has also supported the shadow banking sector by providing a corpus of Rs 50,000 crore to all India financial institutions like SIDBI, NABARD, and NHB for refinancing shadow lenders.  Besides, the long-standing demand of the NBFC sector of availing a moratorium from banks on term loans received a green signal form State Bank of India, albeit on a case-to-case basis.


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