RBI rolls out the Red Carpet for NBFCs

The NBFCs surely needed an antidote with rising NPAs and falling liquidity.

Apr 17, 2020 11:04 IST India Infoline News Service

There was an air of expectation that the RBI press conference on April 17, would predominantly focus on the NBFC sector. Focus it did, and literally rolled out the red carpet for the NBFC sector. In a welcome move, the RBI gave substantial incentives to NBFCs in the form an assured TLTRO 2.0 window, easier NPA classification norms, loan moratoriums and a 25% lower rate of return on reverse repos, thus incentivising banks to lend. The NBFCs surely needed an antidote with rising NPAs and falling liquidity. 

Data Source: RBI Financial Stability Report

Moratorium period excluded from NPA classification
There was a lack of clarity on whether the 3-month EMI moratorium period would be considered for NPA classification. Previously, RBI had only clarified that the EMI moratorium would not impact the credit rating / credit score of the borrower. In its press conference on April 17, the RBI has clarified that the special EMI moratorium period shall be excluded from the NPA classification period of 90 days and the NPA meter shall only commence after that. This will apply to loans given by banks and NBFCs.

NBFCs get special TLTRO 2.0 window
This has been the principal demand of NBFCs in the light of the COVID-19 crisis. The previous TLTRO window was being cornered by bonds of PSUs and large top-rated borrowers. Hence, NBFCs and smaller units had trouble accessing funds. RBI has announced a dedicated Rs50,000cr window for NBFCs and MFIs out of which 50% will be reserved for smaller financials. This will help the NBFC sector tide over the immediate challenge of meeting its obligations of Rs250,000cr towards NCD and CP repayment by end of May.

Banks to channelize liquidity better
With the COVID-19 is causing global losses to the tune of $9 trillion, the channelization of credit becomes critical. Industry and financials must get credit at reasonable cost. Here, the RBI has announced two important measures. Firstly, there has been a cut in the reverse repo rate by 25bps to 3.75%. Reverse repo rate is the rate at which banks keep money with the RBI. With the gap between repo and reverse repo at 75bps, banks have little incentive to keep idle funds. This is an incentive for banks to channelize credit. Secondly, the RBI has imposed a freeze on all dividend declarations by PSU banks and cooperative banks. This may make the dividend yield valuations of PSU banks unattractive but enables banks to channelize credit better.

Cracking the NBFC / Realty puzzle
The RBI has also tried to crack the NBFC / realty puzzle by ensuring simultaneous benefits to both these segments. Firstly, apart from the TLTRO 2.0, there is an additional refinancing facility of Rs50,000cr granted to NHB and NABARD. This is likely to benefit realty companies to access an additional refinance window. Secondly, NBFCs have been specially allowed to extend realty loans by 1 year if the delay is due to factors beyond their control. As realty companies heavily rely on NBFCs for finance, this should help crack the puzzle.

RBI has not minced words about the gravity of the domestic and global macro challenges. The good news is that RBI is willing to look at the response mechanism as work-in-progress. That is good news for NFBCs in particular and the financial markets in general.

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