RBI, Sebi split over default recognition; MFs, rating agencies seek clarity

Contradictory moves by the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) over default recognition, particularly in non-banking financial companies (NBFCs), have put mutual funds (MFs) and credit-rating agencies in a spot at a time when Rs 2.5 trillion worth of papers are due for maturity.

The RBI has announced a three-month moratorium on term loans given by banks, but is silent on liabilities of shadow banks. Sebi, on the other hand, has issued guidelines to rating firms, asking them to avoid assigning a default tag to companies that are unable to pay owing to the ongoing nationwide lockdown.

“Sebi’s directive to rating firms concerning default recognition is not in sync with the central bank’s moratorium, signalling a clash between the two regulators,” a person privy to the issue said, adding that there was a lack of coordination between the two regulators over certain issues, including default classification.

In the absence of clarity, NBFCs are staring at huge repayment obligations at a time when their liquidity cover is declining. To make things further challenging, NBFCs have to extend the moratorium to their customers, resulting in a severe liquidity mismatch.

Industry players are of the view that the RBI and Sebi should resolve the differences, as over Rs 2.5 trillion worth of non-convertible debentures and commercial papers are due to mature in May and June. MFs are among the major holders of these papers.

The issue has also put a lot of onus on rating agencies. Since NBFCs are not covered under moratorium, the RBI’s ‘one rupee, one day’ default norm is applicable to them.

Meanwhile, Sebi has directed rating agencies to take a case-to-case approach by pencilling the impact of the lockdown.

“We have issued a credit alert regarding this and awaiting clarity from regulators to decide the rating actions,” said a source in a rating firm.

Rating agencies say as repayments to NBFCs are virtually frozen, there is a high risk of default without access to fresh lines of liquidity.

“Given the challenges in access to fresh funding and presuming nil collection, a number of NBFCs will face liquidity challenges if they do not get a moratorium on serving their own bank loans and are forced to meet all debt obligations in time,” said Krishnan Sitaraman, senior director, Crisil Ratings.

Large and better-rated NBFCs may still be able to overcome this tide. However, smaller and lower-rated players, which have significant dependence on bank funding, will find the going extremely tough, say experts.

Almost a quarter of NBFCs have liquidity cover of less than one time, with debt obligation aggregating to Rs 1.75 trillion, according to an estimate by Crisil.

“In the light of severity of the situation, some concerted efforts from regulators would be certainly welcome. The RBI’s measures on providing moratorium seem to have left the discretion to banks, and hence NBFCs don’t automatically stand to get relief in respect of their borrowings from banks. The RBI should consider providing some additional relief to NBFCs to tide over this situation, without which many of the NBFCs may have to deal with an ALM mismatch,” said Sai Venkateshwaran, partner and head, CFO Advisory, KPMG in India.