Large groups of small non-banking finance companies (NBFCs) have contacted RBI for demanding a restructuring of loans and fresh liquidity support for on-lending to medium and small enterprises amid the contagious second wave of the Covid-19 Pandemic which is severely impacting their businesses.
The Finance Industry Development Council (FIDC), an NFBC representative and self-regulatory institution, has demanded fresh relief measures for NBFCs via writing a letter to the Reserve Bank of India (RBI).
Let’s discuss the need for regulating NBFCs demands for restructuring loans and fresh liquidity support.
Why are NBFCs demanding restructuring loans and fresh liquidity support measures?
The nationwide lockdown during the first and second Covid-19 waves have severely affected the NFBS and small businesses. The NBFCs are raising their voice to restructuring loans, NBFCs registration, and fresh liquidity support due to persistent loss from the last two years. Small and medium enterprises specifically the self-employed segment are the worst affected businesses, they are left with no other option except to voice these demands to RBI.
MSME’s and wholesale-retail traders require immediate support and backup from the lenders to assess their economic activities. MSME’s have a large share in GDP growth. Thus, lenders require consistent support and assistance to substantiate credit to the borrowers. These issues led NBFCs to request the Reserve Bank of India to facilitate reconstructing loans and provide liquidity support to them.
The FIDC have assessed the Covid-19 situation and characterized the severity of impacts on NBFCs, which are listed below:
NBFCs should start preparing to combat the impact of the current challenges of the COVID-19 pandemic on their NPA, capital, and growth. The staggered opening of the nationwide lockdown will continue to affect their functioning including collections for a prolonged time.
► High impact
- Severe loss of revenue and net profit across the sector
- High dependency on labour due to migration of labour post lockdown also significantly impacted manufacturers system)
- Anticipated critical consequences in the near term, exhibit risk emanating from liquidity stress
► Moderate impact
- Restricted supply for a couple of quarters though having robust balance sheets
- Might have a moderate impact on credit profiles
► Low impact
- Are domestically reliant and not exposed to significant demand pressures may not be impacted significantly owing to COVID-19 hence would see the low impact
What are the demands made by the Finance Industry Development Council (FIDC) to RBI?
The FIDC have stated mainly two demands regarding the restructuring of the loan system to the RBI which are listed below:
- The FIDC has appealed to the Reserve Bank of India to strengthen the support system in Reserve Bank of India’s expenditure to All India Financial Institutions from 50 thousand crore rupees to 75 thousand crore rupees respectively amid the Covid-19 Pandemic.
- They urged for an additional amount of 25 thousand crore rupees solely for the MSMEs and small NFBCs through the channel of SIDBI for the duration of three years. The present allocations for other sectors can continue at the current authorized limits.
- They also demanded that there should be a one-time restructuring of the loans for small non-banking financial companies from the banks and financial institutions. This will ensure loan restructuring of small NBFCs that stay eligible for future financial banking deals without a mismatch in their asset-liability position and it will support their retail and wholesale borrowers with fresh credit.
- Lastly, the Finance Industry Development Council urged that borrower accounts, whether or not their accounts have been restructured and are standard accounts as of 31st March 2021, will be allowed to reconstruct devoid of any demote in the asset classification, subjected to the lending NBFCs undertaking fresh credit evaluation of the borrowing body.
What are the fresh liquidity support demands?
The FIDC have stated mainly two demands regarding the fresh liquidity support system to the RBI which are listed below:
- The FIDC has demanded fresh liquidity support from the Reserve Bank of India governor for on-lending to MSMEs. Amidst the Covid-19 pandemic and deployed restrictions, RBI had earlier announced liquidity measures of 13 lakh crore rupees for the year 2020. It notified the TLTRO on tap scheme on 9th October 2020, which existed till 31st March 2021. Adding to this, they have announced 5 sectors under the scheme, about 26 highly stressed sectors that have been identified by the Kamnath Committee were also covered beneath the sectors eligible for the on-tap TLTRO and bank lending to NBFCs.
- FIDC demanded liquidity availed by the banks under the scheme must be positioned in the corporate bonds, commercial paper and in non-convertible debentures accommodated by institutional bodies in these sectors. It can also be utilised to accommodate bank loans and advances to these sectors. The Reserve Bank of India has extended the TLTRO scheme for a further six months.
What are the impacts of Covid-19 on NBFCs?
The Reserve Bank of India had issued a press release in May 2021 regarding the performance of NBFCs during the Pandemic Covid-19.
Non-banking financial companies have a crucial spot in the Indian financial intermediary space by reinforcing and complementing bank credit, undertaking niche financing, and promoting financial inclusion. Amid the COVID-19 pandemic and nationwide lockdown led to the disruption of vital economic activities deeply, Non-Banking Financial Companies (NBFCs) were critically affected. Assessment of supervisory data is done, the Reserve Bank of India analysed the performance of some selected NBFCs during Q2 and Q3: 2020-21.
Highlights of RBI analysis on NBFCs performance during Covid-19 are provided below:
- The consolidated balance sheet depicts NBFCs going at a slower pace during Q2 and Q3:2020-21. Though NBFCs managed to continue credit intermediation, at a comparatively slower pace, showcasing the resilience of the sector.
- The Reserve Bank of India and the Government have undertaken distinct liquidity augmenting steps to tackle COVID-19 disruptions, with the aim to facilitate favourable market constraints as indicated by the pick-up in debenture issuances.
- NBFCs providing financial services to the industrial sector, particularly micro and small and large industries (MSMEs), were among the hardest-hit industries due to the pandemic as they posted a decline in credit growth.
- NBFCs in the loan sector consistently stay ahead of the curve, sustained by their relatively low delinquency.
- Profitability and efficiency of the NBFCs enhanced narrowly in Q2 and Q3:2020-21 as NBFCs’ outlay registered a steeper fall than income. The asset quality of NBFCs improved in Q2 and Q3:2020-21, vis-à-vis Q4:2019-20, on account of regulatory forbearance to attenuate the repercussions of COVID-19.
The second wave of the Covid-19 pandemic had intensified in May, NBFCs must have started reeling under the pressure of high Non-Performing Assets amidst handling the rising demand of halt and restructuring for the present and deserving customers.
Reserve Bank of India clarified that NFBCs economic activities are severely devastated, during that course of time many borrowers did different kinds of work, shifted to machine operators, marginal farmers, and local contractors in the NBFC segment.
RBI has been providing the time for on-lending profit by six months through review time on an ad-hoc basis as per the FIDC statement.
The FIDC, in its letter, clearly stated, it would be great if the RBI extends its 6th August 2020 notification to 31st March 2022 for the restructuring loans.
RBI has authorized lenders to propose a 3-month moratorium on term loans and deferment of interest payment for working capital facilities. As stated, there would be no alteration in asset classification where a moratorium is sought, thus limiting the effect on reported NPAs. Similar points were also pointed out by SEBI to Credit Rating Agency (CRA) for “Recognition of Default” as per a circular dated 30th March 2020. After assessing, if CRAs notices an obstruction in interest/principle arising due to the lockdown, the same will not be regarded as default.
To relieve pressure on cash flow across various sectors for the near term, the Finance Ministry has announced an extension for filing direct and indirect tax and the Government to endure the 24% beneficiation of both employee and employer to the Employees’ provident fund for three months. It is solely applicable to businesses with more than 100 employees and amongst them, 90% of employees must be earning less than Rs 15,000 per month.
Considering the current capital and liquidity position of financial institutions (FI), FIs have to be extra cautious for new loan book and have to include five main factors in amended credit lending policy, which broadly focus on the below-mentioned points:
- Resolve: Need to address the current COVID-19 challenges to represent the institutions, workforce, customers, and business partners
- Resilience: There is a need to address present cash management issues, and durability challenges during nationwide lockdowns and economic knock-on consequences.
- Return: To create a detailed plan of action to restore the business back and to speed up faster
- Reimagination: Shift focus upon re-imagine and reinvent the implications for how the institution should be restructured
- Reform: Clarity regarding how the regulatory and competitive environment in the industry may relocate.