Borrowing cost up 1.2-1.5% for small finance cos despite liquidity: Crisil

The perception of risk is hard to shake off when it comes to funding small and mini finance companies, which serve those at the bottom of the pyramid. Despite lower interest rates in the market as a whole, their average cost of borrowings rose by 1.2-1.5 per cent between fiscal 2018 and 2021, according to a Crisil analysis.

The second Covid-19 wave has likely intensified the pressure points for small and mini non-banks.

The Reserve Bank of India injected Rs 5.75 trillion into the system to fight the pandemic and keep interest rates soft. But this failed to mitigate the three-year-long twin ordeals of those catering to the underserved and informal sector customers with weak income documentation.

In contrast, larger finance firms and housing finance companies reaped benefits of liquidity surge. Cost of borrowings for the larger NBFCs/HFCs fell to their fiscal 2018 levels. That for large MFIs too declined by 100 basis points (one percent) over the past three fiscals.

According to a Crisil-Omdyar India joint report, rising borrowing costs and limited funding availability have been plaguing non-banks right from the IL&FS crisis in September 2018 through this pandemic. The double whammy has been particularly harsh for small and mini non-banks focused on retail assets. Omidyar Network India invests in bold entrepreneurs who help create a meaningful life, especially of millions of low income and lower-middle class Indians.

The surfeit of liquidity last fiscal has made little difference to small and mini finance firms. Rather, their lenders often denied them the Reserve Bank of India’s (RBI) moratorium on loans even as these firms extended the moratorium to their own customers. This gave rise to three kinds of trouble for them post-pandemic: increasing cash flow mismatch, contraction of credit and higher costs of borrowing.

Some of these lenders were able to raise funds from larger NBFCs and foreign investors last fiscal. But these channels are costlier than banks and capital markets,

Indeed, a lot more needs to be done by way of support. What specific focus should that take? One, targeted funding along with adequate incentives and downside protection could be one way to ramp up liquidity – given that most lenders tend to be pro-cyclical.

Two, credit pools could be created during economic upturns to absorb shocks during crises. Three, instead of a one-size-fits-all, policy decisions on loan tenure and provisioning requirements should take into account the nuances of each asset class and their credit cost experience.

Finally, a centralised certification system to grade the strength of systems and processes of smaller players. It would provide comfort to investors and lenders to take higher exposures and lower risk premiums, CRISIL report added.