The RBI may have to open direct liquidity window for small NBFCs and MFIs as banks refuse to offer moratorium to them on one hand, and gave a muted response to the first TLTRO auction, aggravating their funding gap to ₹50,000-60,000 crore, according to a report.

Small and medium shadow banks and micro-lenders need a direct refinance from financial institutions or the RBI should open direct refinance window for them, Acuite Ratings said, a day after the apex bank said the first TLTRO auction of ₹25,000 crore saw a tepid response from banks, which put in bids for just half the amount -- only ₹12,850 crore.

“We believe the liquidity concerns of NBFCs (non-bank financial companies) and MFIs (microfinance institutions) have aggravated and a quick response is the need of the hour. The funding gap is estimated to further increase to ₹50,000-60,000 crore,” the agency said in a report.

The estimate is based on the analysis of “the top 11 retail NBFCs which may find the funding gap of ₹10,000-20,000 crore in Q1. Without the moratorium or partial moratorium from banks, the funding gap will increase further to ₹15,000-25,000 crore in Q1. Clearly, the gap for the sector including MFIs in Q1 will be much higher at ₹50,000-60,000 crore based on broad estimates“.

While the Reserve Bank of India has provided a three-month moratorium to all borrowers, including NBFCs and MFIs for March-May, it is increasingly clear that all banks are not likely to grant such a moratorium for their NBFC or MFI borrowers.

Further, a 50 per cent response to the first tranche of bids TLTRO 2.0 indicates that banks are hesitant to take fresh exposures to the sector, particularly to small and mid-sized NBFCs, including MFIs now.

“Thus, a refinance window of ₹50,000 crore through government financial institutions such as Sidbi assumes significant relevance. We feel that lack of backup or alternative funding lines will have serious implications for the sustainability of NBFCs over the next three months as loan collections are likely to be limited during the moratorium,” the report said.

Long-term repo operations

With the first targeted long-term repo operations (TLTRO) 2.0 failing fresh funding or refinancing to the sector from this route is unlikely to exceed ₹10,000 crore unless there is a significant change in the banks’ response in the second tranche, it said.

“We believe that the ₹50,000-crore refinance window through National Bank for Agriculture and Rural Development (Nabard), Small industrial Development Bank of India (Sidbi) and National Housing Bank (NHB) will be critical,” the rating agency said.

Under this, Nabard is getting Rs 25,000 crore, Sidbi is allotted ₹15,000 crore and NHB is getting the remaining ₹10,000 crore. Of the three Sidbi has already announced schemes to provide liquidity by extending short-term loans to NBFCs and MFIs.

“While the refinance facility will be available to small and mid-sized NBFCs who provide loans to MSMEs (micro, small and medium enterprises), they need to be rated in the investment grade with a minimum networth of ₹20 crore and with capital adequacy above the mandatory levels.

“This may provide some short-term relief to the sector and enable some players to sustain their operations for another three months. But, if collections don’t revive rapidly, the liquidity challenges may continue and will necessitate longer term funding,” the report concluded.