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
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.