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Economic package for NBFCs, MSMEs needs speedy implementation: India Ratings

Lower-rated NBFCs are not active in the bond market and hence investments through non-convertible debentures could create challenges
  • Given the urgent need of funds for MSME sector, the modalities of equity infusion can be time consuming
  • The  ₹50,000-crore equity infusion in MSMEs through the fund of funds route is aimed at increasing the capacity of viable MSMEsPremium
    The 50,000-crore equity infusion in MSMEs through the fund of funds route is aimed at increasing the capacity of viable MSMEs

    MUMBAI : Speedy implementation of the economic package announced by finance minister Nirmala Sitharaman would be key in providing relief to non-banking financial companies (NBFCs) and micro, small and medium enterprises (MSMEs), said rating agency India Ratings and Research (Ind-Ra).

    “The 30,000-crore special liquidity scheme (free of guarantee cost) can incentivise banks to take exposure in the lower rated investment grade NBFCs. Moreover, banks would be able to have slightly better pricing on these loans, notwithstanding them being proposed to be backed by a government guarantee, on account of the lower bargaining power of the lower rated NBFCs," India Rating said.

    According to the report, lower-rated NBFCs are not active in the bond market and hence investments through non-convertible debentures could create challenges. Furthermore, lenders would be looking at the operational guidelines to understand reimbursement from the government, or if these can be at the time of it becoming delinquent or it is after completion of recovery proceedings, the report said.

    “The scheme allows for primary and secondary market transactions which can help mutual funds (especially credit funds) sell some of their papers and generate liquidity easing some pressure on them," it said.

    The rating agency pointed out that the 50,000-crore equity infusion in MSMEs through the fund of funds route is aimed at increasing the capacity of viable MSMEs.

    It believes that this route of assisting MSMEs may be time-consuming as it could involve a valuation exercise regarding the quantum of stake that could be purchased. Given the urgent need of funds for the sector, the modalities of the equity infusion can be time consuming, it added.

    “The 45,000-crore partial credit guarantee scheme with 20% first loss protection from the government is aimed at providing some incentive to lenders. Unlike the earlier scheme which was meant only for direct assignment transactions, this scheme now covers even primary borrowings by NBFCs such as bonds and commercial papers," the report said.

    This could provide some liquidity window to small NBFCs, provided lenders have the risk appetite to fund these entities after getting 20% loss cushion, it said, adding that while the 20% first loss protection in the assignment can be a strong incentive if operationalised suitably, investments by lenders in primary papers based on the 20% guarantee would be based on loss estimation.

    “This may lead to the funds largely flowing to higher rated entities," the rating agency said.

    ABOUT THE AUTHOR
    Shayan Ghosh
    Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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    Updated: 20 May 2020, 10:05 AM IST
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