Finance Minister Nirmala Sitaraman on Wednesday gave a major increase of Rs. 75,000 to shadow lenders and microfinance institutions (MFIs) struggling with cash flow problems as bank loans become increasingly risky.
Sitharaman announced a special liquidity facility of Rs. 30,000 for Non-Bank Financial Corporations (NBFCs), Housing Finance Corporations (HFCs) and MFIs struggling to raise funds in the debt markets. This programme invests in high-quality debt instruments of the NBFC, the CSFB and the MFIs, both primary and secondary markets. And all bonds purchased under this special liquidity programme are guaranteed by the government.
This will provide liquidity support for the NBFC, GFC, MFIs and investment funds and will increase confidence in the market, according to the Minister of Finance.
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Previously, as part of the Rupee Long Term Repo Operation (TLTRO 2.0), RBI had provided a block of 50,000 rupees, in which banks had to borrow money from the central bank at an interest rate of 4.4% and invest it in bonds issued by fictitious creditors. However, RBI received only about half of the Rs 25 000 applications offered in the first tranche, indicating that banks were reluctant to lend to NBFK. The banks made 14 bids for a total of Rs.12.850.
Second, the FM announced that the government will extend the existing partial loan guarantee scheme (PCGS 2.0) to bonds such as primary bond issues, NBFK, GFC and MFI commercial paper, which will result in the first 20% loss to the government as guarantor, including for unrated paper. This will support the shadow banking sector with additional liquidity from Rs. 45.000. Documents from creditors with a credit rating of AA and below are invested under this programme.
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Among the most important announcements, the government announced that it would provide a 100% principal loan guarantee to credit agencies in the RSI sector. Loans for a total amount of Rs. 3 trillion will be granted for four years, with a 12-month grace period for repayment of principal.
The move to support the 100% credit guarantee for the MSME sector will strengthen banks’ and SFBC’s confidence in the credit activities of the sector. A special liquidity scheme will facilitate the issuance of cash to NBFCs that can obtain a certain rating and the first guarantee against losses on the subscription of securities, even without a rating, will help smaller creditors obtain funds, said Ramesh Iyer, Vice President of VC & MD, Mahindra & Mahindra Finance, and President of IFCD.
According to Deo Shankar Tripathi, Managing Director of Aadhar Housing Finance, the state-guaranteed banks will now be eager to raise money from RBI and support poorly rated companies. This measure will largely solve the liquidity problems of these creditors.
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Under the previous partial loan guarantee scheme, the State-owned banks (PSBs) were offered to purchase high-quality combined assets from NBFC for up to Rs 1 trillion, for which the government granted a one-off six-month partial loan guarantee for initial losses of up to 10 %. The NBFC and the MFIs welcomed the special liquidity programme. However, problems remain for small MFIs. Most small MFIs do not have a level of investment and will therefore not benefit from this scheme.
We hope that both programs will not neglect small MFIs that are below the investment threshold, said P. Satish, CEO of Sa-Dhan.
This is a revolutionary step for the MFI sector. Credit losses in this sector generally do not exceed 0.5%. The government gives a 20% guarantee. The bottom line is that RBI and the government have realised that credit from MFIs can reach 300 million customers, according to Manoj Nambiar, chairman of the MFI.
Following the announcement of the liquidity support, spreads on corporate bonds are expected to narrow. It was also a long-standing demand from industry and banks that were reluctant to invest in NBFC securities without a government guarantee.
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This time the funds are earmarked for all bonds, including unrated bonds, which are most in need of liquidity support. Only a handful of NBHCs belong to the AAA category, most of which are government agencies. The AA category has a significant share, but more than 70% of the more than 10,000 NBFCs in India are rated A and below, which according to market information are mainly concentrated in the BBB category or below investment grade.
ChartThe NBFK generally issues corporate bonds in the market with maturities of three and seven years. The spread between the G-sections at 5 years and the equivalent AAA paper at maturity should normally be around 60-70 basis points. In times of stress, the gap has even widened to 90-100 basis points.
However, the gap is now about 120 basis points. The spread is now 185 basis points for AA securities and 290 basis points for A securities, according to the FIMMDA (Fixed Income Money Market and Derivatives Association of India).
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This augurs well for the corporate bond market as a whole, as a lower spread on the lowest rated NBFK would have a positive effect on the highest rated NBFK, and we were able to see spreads on AAA-rated NBFK and corporate compression spreads on public sector equity issuers, which had previously been close to 100 basis points in the three-year segment, according to B. Prasanna, head of Global Markets at ICICI Bank.
In addition to the measures announced by the government, RBI has also supported the shadow banking sector by providing all Indian financial institutions such as SIDBI, NABARD and NHB with Rs. 50,000 to refinance the shadow creditors. Moreover, the NBFC sector has long since given the go-ahead for a moratorium on long-term bank credits from the State Bank of India, albeit on an individual basis.