As an old adage goes, “If you try and fail, you must try again”. Even if that means using a decade-old idea to tackle the same problem. In keeping with its stance of doing “whatever it takes” to salvage the financial system in Covid times, the RBI has opened up a special liquidity window to support NBFCs/HFCs. The idea is similar to one used in February 2009 for NBFCs after the global financial crisis.
The Central bank last week announced a ‘special’ liquidity window for NBFCs and HFCs, following the announcement by the Centre in May that it would help NBFCs/HFCs stave off a liquidity crisis in its Atmanirbhar Bharat package. This comes a few months after the RBI tried to use targeted long-term repo rate operations in April to help stave off a liquidity crisis in NBFCs. Apart from receiving a poor response, a few ‘special’ companies are said to have cornered much of the funds from this window.
But what is so special about this new liquidity window, apart from the fact that the Centre is not contributing anything to it?
What is it?
A special purpose vehicle (SPV) called SLS Trust, a subsidiary of SBI Capital Markets, will buy commercial papers and NCDs which have a remaining maturity period of 90 days. These securities will be purchased by the SPV either from primary issues by NBFCs/HFCs or from existing holders via the secondary market.
These securities should be issued by NBFCs/HFCs before September 30, 2020, and the SPV must buy them before the same date. The amount borrowed under this scheme should be repaid before December 31, 2020. Only investment-grade bonds can be bought. Through this special liquidity window, the RBI is trying to help NBFCs/HFCs tide over their short-term cash flow problems, expected to arise due to moratoriums claimed by their retail customers. The cash crunch is expected to be aggravated by the fact that a chunk of NCDs (₹1,25,000 crore) issued by these entities will mature from July to December 2020. The RBI will fund this exercise.
Why is it important?
As a part of the Covid relief, NBFCs/HFCs were asked to provide their borrowers with a moratorium on loans. But only some NBFCs/HFCs have, in turn, received a moratorium from the banks that have lent to them. Also, these entities usually borrow from the market through bonds, NCDs and commercial papers, which are not eligible for any moratorium.
As many retail borrowers have opted for a moratorium on their car, home, consumer and other loans, NBFCs/HFCs are in a pickle because they have to repay their debt, while their customers have still not repaid their obligations.
To douse the fire, the RBI has tried many tools in the past few months. Now, it is using another tool directed specifically at NBFCs/HFCs, in keeping with the Centre’s announcement of a ₹30,000-crore special liquidity window for these entities.
The funds raised through this special liquidity facility are expected to help repay the current dues of NBFCs/HFCs. However, given that this window is only for investment-grade bonds and the Trust has limited money to expend, there is a fear that again a few large NBFCs/HFCs, (certain ‘special’ entities, if you will) will corner much of this ₹30,000-crore bounty.
Why should I care?
A repayment crisis in NBFCs/HFCs can easily hurt in the financial system. Let’s not forget, many NBFC/HFC bonds figure in the books of debt mutual funds, which retail investors hold. Some also raise bonds and deposits directly from retail investors.
If these entities default on their debt, in the future, they will be not be able to raise funds from the market. That means credit pick-up, which is already moving at a glacial pace, will come to a screeching halt. This in turn could impact the Indian economy further.
The bottomline
Textbooks say that the RBI is the lender of last resort. Now, it transpires, it is also the buyer of last resort, when things get sticky in the bond market.
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