Central Bank gives an aggressive boost to NBFCs and banks
On 17th April, the RBI announced slew of measures to boost the sentiments in the market and specifically to bail out the NBFCs. While the package was for markets overall, the primary focus was to help the NBFCs survive the torrid challenges posed by COVID-19.
Cut in reverse repo
The RBI proactively cut the reverse repo rate by 25 bps to 3.75%. This not only reduces what banks earn on the monies parked with the RBI, but also widens the gap with the repo rate to 65 bps. The idea is that banks should feel incentivized to lend more to industry and to NBFCs rather than just parking funds with the RBI. Whether it results in the desired effect remains to be seen, but it is surely the right step in that direction. NBFCs should benefit from this surge in liquidity with the banks.
Leg up for realty
The relationship between NBFCs and the realty sector has been a symbiotic one. Both have literally grown with support of one another. This is truer of smaller real estate companies that had limited access to bank funds or even markets. The RBI has now permitted NBFCs to postpone realty loans by up to 1 year where the delay is due to genuine business distress. Such an extension will not attract higher provisioning or even reclassification as sub-standard assets. This would be a boost in these times.
TLTRO 2.0 window
This is, perhaps, the most significant announcement that is likely to favor the NBFC segment. Apart from the regular TLTRO, which was cornered by PSU and top rated borrowers, RBI will now have a special TLTRO for NBFCs to the tune of Rs.50,000 crore. Half of this amount will be reserved for small and mid-sized NBFCs. This announcement is actually significant for a couple of reasons. Firstly, NBFCs have nearly Rs.2.5 trillion worth NCDs and CP coming up for repayment before May 2020. In the absence of this funding window, there would have been a spate of defaults. Secondly, this will also help NBFCs in routine rollover of debts.
Moratorium boost to NBFCs
When the RBI announced the 3-month moratorium for borrowers in its last credit policy, only the perspective of the borrower was covered. On 17 April, the RBI has also clarified on the lender perspective. According to RBI, any NPA classification on loans given by banks and NBFCs will only start after excluding the moratorium period given as part of the COVID-19 rescue package. Just as the moratorium will not impact the credit score of the borrower, it will also not impact the NPA levels of the lender. This will be a great boost for NBFCs, especially the smaller ones. The real onus will now be on the banks to use these measures to boost credit.