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MUMBAI : Reserve bank of India may have infused 3.75 lakh crore liquidity into the system, however bankers say there will still be flight to quality as they prefer highly rated borrowers, leaving the rest on their own.

Since the covid-19 pandemic is expected to increase business uncertainty, hitting prospective cash flows of companies, banks will look at the strength of the balance-sheet and past performance before funding these firms.

“Flight to quality will continue. Weaker NBFCs and other corporates will find it difficult to get funds. Earlier wholesale NBFCs found it difficult to get funding from banks. Now retail NBFCs which have riskier portfolio will struggle to get refinancing done," said a senior banker.

On Friday RBI allowed banks to borrow up to 1 lakh crore through the targeted long-term repo operations (TLTRO) for deployment in investment grade corporate bonds, commercial paper and non-convertible debentures (NCD). On the same day, the central bank had conducted an auction of 25,000 crore, for which it received bids as much as 60,500 crore. Bankers say they could earn anywhere between a 300-400 basis points spread if they avail funds under the scheme and invest in a AAA or AA paper. They can even classify these bonds as Held To Maturity (HTM) in excess of 25% of total investment permitted, thereby exempting them from mark to market risk. However, bankers agree that they will be risk averse in this market and will look at investing in AAA rated papers.

“Bank will be not looking to take credit risk as they don’t know what is going to happen and how long the crisis is likely to continue. So weaker corporate credit issuers will find it difficult to get funding at this point of time. Banks will do their own independent credit assessment and eye on the current environment," said Ajay Manglunia, managing director and head of fixed income at JM Financial

According to Bloomberg data, nearly 4.47 lakh crore rupees worth of corporate bonds are coming up for repayment this year. Prime Database figures shows that nearly 1.23 lakh crore worth of commercial papers are coming up for maturity this year. Since the RBI’s dispensation on deferment of repayment doesn’t include CPs, NCDs and corporate bonds, most of the corporates will have to look at refinancing make some of these repayments.

Experts believe that bankers are unlikely to invest in bonds across sectors. “Banks will make their own choice. Better guys will get money. Weaker guys will have problem. Pain will be felt by smaller NBFCs and small and medium enterprises," said an NBFC official.

Non-banking finance companies, which have just come out of a liquidity crisis, are now worried that funding will be an issue. Finance Industry Development Council (FIDC), an association of non-banking finance companies, has already expressed its concerns that not all companies will get the desired liquidity from banks. The association is therefore seeking a 90-day moratorium on interest payments due on bonds, mutual funds and commercial papers.

“The class of borrowers to whom we cater to are the ones who have been worst hit with the lockdown. People owning autorickshaws, tempos, E-Rickshaws, small shopkeepers and the MSMEs. They have already expressed their inability to repay and therefore deserve to be given moratorium. The real worry is while we give moratorium to our borrowers, will NBFCs be also given moratorium by our lenders like banks and FIs." said Raman Aggarwal, co-chairman, FIDC.

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