Money & Banking

Liquidity woes: Small and medium NBFCs seek funding support from Centre

KR Srivats New Delhi | Updated on July 17, 2020

Small and medium NBFCs, which account for 90 per cent of such entities registered with the RBI, have knocked the Centre’s door seeking funding support, stating that the measures taken so far have provided only a limited relief to them.

Most of the money (from government and RBI interventions) has flowed into a smaller number of large NBFCs, which are highly rated, said the Finance Industry Development Council ( FIDC) Co-Chairman Raman Aggarwal in a letter to Finance Minister Nirmala Sitharaman.

No major relief

Despite the steps taken, the situation of small- and medium-sized NBFCs has not changed significantly, and these companies continue to face difficulties in raising funds, according to the FIDC.

FIDC is of the view that the lower translation of benefits to mid- and small-sized NBFCs through TLTRO, Partial Credit Guarantee and other similar interventions seem to be stemming from the tighter evaluation criteria adopted by the banks related to the profit and loss account, such as interest coverage ratio, credit losses, and consequently the profitability.

These ratios are obviously under stress due to the headwinds faced by small- and medium-sized NBFCs, such as failure of few large NBFCs (IL&FS, DHFL), economic slowdown in FY20, and now Covid19.

Moreover, due to a major withdrawal of mutual funds and insurance companies from the funding of NBFCs, even large companies have been borrowing mainly from banks, and it has left hardly any space for small and medium NBFCs. Therefore, these small and medium NBFCs have been crowded out and banks have been citing sectoral exposure caps to deny the credit facilities to such entities, said Aggarwal.

FIDC has suggested that the mode of funding to small and medium NBFCs should be term loans only. Also, credit rating should not be an eligibility criteria. A fund dedicated to funding small and medium NBFCs may be allocated to financial institutions such as NABARD or SIDBI, the FIDC has suggested. All NBFCs irrespective of their size and credit rating (even unrated) should be eligible, Aggarwal added.

There should also be regulatory forbearance and advice to banks / FIs to show leniency towards the financial covenants related to profit and loss account for FY20 and FY21, said the FIDC.

Published on July 16, 2020

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