Covid-19 Economic Package: NBFCs Get Liquidity Relief Via Government Loan Guarantees 

The Government of India has stepped in to provide liquidity support to non-bank lenders, many of whom serve customers at the bottom of the pyramid.

In announcements made on Wednesday, the government agreed to provide full and partial guarantees on investments in debt securities issued by non-bank lenders under two different schemes.

• The first scheme is a Rs 30,000 crore special liquidity facility.
• Under this scheme, investments can be made in investment grade debt securities of NBFCs, housing finance companies and microfinance institutions.
• These investments will be fully guaranteed by the government.

This facility will help create demand for securities issued by these non-bank lenders and help provide liquidity to them. Risk aversion in the current environment has meant that mutual funds and other investors have been reluctant to buy NBFC debt, leaving bank finance as the only option for them.

While the first scheme is intended to help the investment grade non-bank lenders, a second scheme has been expanded to help smaller entities such as microfinance companies.

According to the government:

• The Rs 45,000 crore partial credit guarantee scheme is being expanded.

• Scheme extended to cover primary issues of lower-rated NBFCs.

• For investment in such securities, the government will provide a 20 percent first loss guarantee.
• Lower-rated and unrated securities will be eligible for relief via the scheme.

Separately, the government also said that micro, small and medium sized enterprises will get Rs 3 lakh crore in collateral free, government guaranteed loans.

Will The Schemes Provide Adequate Relief?

Abizer Diwanji, leader for financial services at EY, said that support being provided by the two schemes is still too small given the size of the problem. “NBFCs account for Rs 27 lakh crore in term of lending, of which Rs 19 lakh crore is financed via the capital markets. Most except the top non-bank lenders have been shut out of the market. For the existing legacy balancesheets of NBFCs, there is still not much support,” he said.

“However, the transmission of the Rs 3 lakh crore in collateral-free government-backed loans to MSMEs will mostly flow through the NBFC sector and can be quickly refinanced via banks. This, in turn, will bring liquidity into the NBFC balancesheets,” Diwanji said.

According to Hemant Kanoria, chairman, SREI Equipment Finance the measures announced could help NBFCs deal with their asset-liability mismatches, since liquidity support to the low rated lenders has been difficult to come by. “But we have to see whether the benefit genuinely comes to us. Else, the funds will go to well rated NBFCs which are already flush with funds,” Kanoria said.

Speaking about the support to MSMEs, announced by the government, Kanoria said that the structure of extending these loans will be crucial to understand. A better way to deal with funding requirements of MSMEs would have been to club this Rs 3 lakh crore liquidity announcement with a one time restructuring, to help these companies come back to shape, he said.

Mehernosh Tata, head of SME lending at Edelweiss Retail Finance Ltd said that the Rs 3 lakh crore collateral free loans, will be a big plus for MSMEs as this will work as “restart capital” for MSMEs to pay their bills and arrears, for their units to begin functioning. “But we will need to wait for the fine print to see how these funds get transmitted to NBFCs and then to MSMEs. For example, if we were to cover 45 lakh MSMEs, the smaller units would get Rs 6.5 to 7 lakh on an average, which is good enough to start with,” Tata said.

Commenting on the NBFC liquidity facilities, Tata said that guaranteeing loans fully or partially is a much better way to transmit money than targeted long term repo operations. “Since the government is going to give 100 percent guarantee to the debt paper which banks will find safer to subscribe to. The Rs 30,000 crore liquidity to NBFCs/HFCs/ MFIs is a step in the right direction. If successful, the government may enhance this limit over time.”

Mahesh Misra, chief executive officer of the India Mortgage Guarantee Corporation, also believed that further clarity is needed on the MSME loan guarantee scheme. “We still don't have clarity on whether this Rs 3 lakh crore is for new facilities or an enhancement of existing facilities. Second, if it is for new facilities, what will be the eligibility norms applied. Third, a key problem with guarantees is that if it is permitted for new facilities, it could very well be treated as a licence to default,” Misra cautioned.

Watch a conversation on the measures announced below:

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