NBFCs ask FM to offer credit guarantees to banks on loans extended by them

Industry has also pitched for SPV with initial funding from govt, to help refinance small and mid-sized NBFCs

An association of non-banking finance companies has written to the finance minister, seeking alternate sources of funding for shadow lenders. It has urged her to provide credit guarantee to banks in order to encourage them to provide much-needed liquidity to a sector that they have for long been averse to lending.

The Finance Industry Development Council (FIDC) has said in its letter that the government may provide credit guarantee to banks for the additional exposure they take on NBFCs so long as they lend to deserving sectors. “This guarantee should be for both, term loans and asset pool purchase, and should be valid for four years or the full tenure, whichever is shorter,” the letter said.

It has also pitched for establishing a special purpose vehicle (SPV) which would help in refinancing small and mid-sized NBFCs with the government infusing the initial capital in it. It may later be allowed to raise debt through the issue of bonds. The SPV may be allowed to leverage about four times, thus providing Rs 50,000 crore of fresh funds to NBFCs.

In addition the association has said there is a need to reduce the over-dependence of shadow lenders on banks for funding by establishing a refinance mechanism which will be a dedicated source of funds for the liquidity starved sector to avail long term finance.

To achieve this, the Micro Units Development and Refinance Agency Bank (MUDRA) norms on cap on interest rate spreads and minimum prescribed rating needs to be tweaked. Moreover, National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI) should be allocated funds for the purpose of refinancing the shadow lenders and the role of National Housing Bank can be extended to provide refinancing facility to not only mortgage lender but also to the NBFCs.

The recent targeted long term repo operations meant to provide liquidity support to the shadow banking sector did not garner the expected response with the Reserve Bank of India (RBI) receiving bids for only about half the Rs 25,000 crore it offered, indicating that banks are reluctant to lend to non-banking financial companies. In addition to TLTRO 2.0 the RBI has provided institutions like SIDBI, NABARD and NHB with Rs 50,000 crore to provided refinancing facilities to NBFCs, HFCs and microfinance institutions.

The NBFC/HFCs and microfinance institutions are facing a double whammy wherein due to the lockdown their collections have dropped and they have also provided moratorium to their borrowers on the monthly repayments but only a handful of them are getting the moratorium benefits on the loans they have availed from the banks. Moreover, they have debt market obligations as well as fixed costs that they have to meet.