Non-banking finance companies ( NBFCs), with close to 10,000 entities and assets size of Rs 32 lakh crore, have been left to fend for themselves in these difficult times as the banking sector has refused to provide them any moratorium on term loans.
All banks are currently offering a three-month moratorium on loan instalments to corporate as well as retail borrowers. But they aren't offering the same to NBFCs.
The reason for this is that NBFCs are 'lending institutions' which offer the moratorium to customers, so they can't avail the moratorium themselves. But, interestingly, the total outstanding bank loan to NBFC sector is around Rs 7 lakh crore. So, unfortunately, they too have a lot to pay up.
The Reserve Bank of India (RBI) in its COVID-19 package has said that all commercial banks, cooperative banks and NBFCs including MFIs and housing finance companies are permitted to provide a moratorium on all kinds of term loans.
The largest bank in the country, the State Bank of India (SBI), has even gone on record saying that the moratorium on term loan is not applicable to banks term loans to NBFCs.
Similarly, the Indian Banks Association (IBA)'s circular does not include NBFCs as beneficiary of three months moratorium on term loans. The IBA circular has also not considered MFIs and HFCs as direct beneficiary of working capital financing.
Under the RBI guidelines, the NBFCs are offered indirect support through banks. The RBI is extending liquidity support to banks and the banks in turn have to support NBFCs by deploying funds in investment grade corporate bonds, commercial paper and NCDs of these entities.
Who Can Help?
NBFCs have knocked on the doors of government and the RBI. And, the ball is now in the RBI's court. A nudge from the finance ministry may force banks to include NBFCs under the moratorium ambit. But that will give NBFCs an unfair advantage as many are as big as mid-sized banks. Take for instance, HDFC Ltd, Bajaj Finance, HDFB Finance, LIC Housing Finance, Tata Capital.
There is also a view that NBFCs are a key player in credit intermediation in the market as they serve the self-employed and micro segment which are the hardest hit from the lockdown as compared to banks' salaried customers.
While RBI has asked NBFCs to offer three-month moratorium to their customers, the NBFCs are at a disadvantageous position because they don't have the advantage of low cost funds via savings and current accounts.
The RBI should ideally create some sort of a separate window (though direct funding without collateral is not possible) or government should step in with some guarantee to help the sector.
Apart from bank loans, the NBFCs have a huge borrowings of over Rs 9 lakh crore from the market via debentures and commercial papers (CPs). Any redemption pressure in these instruments could lead to asset liability mismatch. The sector, which is yet to recover from the IL&FS shock, is once again staring at drying of funding sources.