After IL&FS crisis, Covid-19 makes NBFCs struggle despite RBI actions

The shadow banking sector was already struggling with funds in light of the IL&FS crisis when Covid-19 hit. While bank credit to NBFCs has seen a rise of 30 per cent year on year, credit has mostly flown into larger NBFCs with good parentage and ones with better ALM positions. 

After the IL&FS fiasco, private NBFCs have reduced their dependence on commercial papers (CPs) from Rs 2.22 trillion in July 2018 to Rs 64,253 crore in April 2020, and HFCs reliance on CPs has come down from Rs 1.4 trillion in July 2018 to Rs 50,691 crore in April 2020. The share of private NBFCs in total issues has fallen sharply, and there has been a sharper reduction in issues by lower-rated NBFCs, possibly a manifestation of the increasingly challenging financial conditions faced by them. 

Mutual funds, which are the largest investors in the CP market, have brought down their share in AA and below-rated NBFCs from 94 per cent in December 2019 to 74 per cent in April 2020. On the other hand, NBFCs have increased their offshore borrowing as the share of foreign currency bonds issued by NBFCs in their total outstanding market liabilities has increased. 

While the RBI undertook long-term repo operations to ease liquidity constraints, mostly AAA rated entities and public sector undertakings, got the benefit of the operation and the TLTRO 2.0, which was supposed to provide relief to lower-rated NBFCs, didn’t see a good response. 

But, these actions of the RBI have managed to bring rates down in 1-year, 2-3-year and over 10-year buckets of corporate bond issues. 

An RBI paper has suggested further policy interventions by the central bank with concrete credit backstop measures to address the risk aversion in the system, and ensure flow of funds to credit-worthy NBFCs, especially small and medium-sized ones and to minimise systemic risks.