PremiumThe Reserve Bank of India (RBI) on Friday provided much-needed liquidity support to non-banking financial companies (NBFCs) and microfinance institutions (MFIs) by announcing a second tranche of targeted long-term repo operation window (TLTRO 2.0) of at least ₹50,000 crore.
Under the TLTRO 2.0 window, banks can access three-year funding from the RBI to invest in investment-grade papers of NBFCs, with at least 50% invested in small- and mid-sized NBFCs and MFIs.
Within this, 10% will be invested in securities issued by MFIs, 15% in securities issued by NBFCs with asset size of ₹500 crore and below, and another 25% in securities issued by NBFCs with asset size of ₹500-5,000 crore.
The central bank will make available further liquidity under this facility, depending on the pattern of utilization and requirement, assured RBI governor Shaktikanta Das.
Banks will have to make these investments within one month of raising funds under the TLTRO. Exposures under the facility will not be accounted for while calculating the large corporate exposure.
These investments will be classified as held-to-maturity even in excess of 25% of total investment permitted.
The advantage is that in case these papers depreciate in value, banks need not take a balance-sheet hit by marking them to market.
The move to announce a special liquidity facility under the TLTRO 2.0 window for NBFCs and MFIs comes as these companies failed to get funding under the earlier TLTRO scheme. While the RBI had released ₹1 trillion into the system under this window, banks had utilized these funds for investing in high-rate corporate papers. This left out the small- and mid-sized NBFCs and MFIs, which were facing liquidity challenges, as the coronavirus-led lockdown resulted in businesses closures.
According to Prime Database, corporate bonds worth ₹91,902 crore and commercial papers worth ₹77,797 crore were coming up for maturity by May-end.
Among corporate bonds, ₹47,579 crore worth of non-AAA rated bonds are coming up for maturity.
As an indirect liquidity measure, RBI said it will provide a special refinance facility for ₹50,000 crore to all financial institutions, including Nabard and Small Industries Development Bank of India (Sidbi). This will comprise of ₹25,000 crore to Nabard for refinancing regional rural banks, cooperative banks and MFIs; ₹15,000 crore to Sidbi for on-lending or refinancing; and ₹10,000 crore to NHB for supporting housing finance companies. The funds will be available at the RBI’s policy repo rate at the time of availing the loans.
“Under the TLTRO 1 announced by RBI, the entire money went to big corporates and PSUs. With ₹25,000 crore of funding under the dedicated TLTRO window going to small- and medium-sized NBFCs, the immediate liquidity needs of these NBFCs are taken care," said Raman Aggarwal, chairman, Finance Industry Development Council, a self-regulatory organization for NBFCs.
“However, the moratorium continues to be a key irritant. While the RBI did not talk about, we expect the Indian Banks’ Association to take a decision in its management meeting on Saturday," he said.
However, banks will continue to be cautious while investing in the bonds of NBFCs and MFIs as they carry higher risk.
“RBI has allowed banks to buy investment-grade corporate bonds and hold them till maturity. You have taken care of market risk. But who is taking the credit risk? Credit risk needs to be addressed as it continues to be on the books of banks, thereby stifling them from lending," said a senior bank official, speaking on the condition of anonymity.
