However, if collections don’t revive rapidly for the NBFCs and MFIs in particular within this period, the liquidity challenges may continue and will necessitate longer term funding,” the firm said.
As banks are unlikely to grant moratorium for their NBFC and MFI exposures and following a weak response to targeted long-term repo operations (TLTRO), Acuité Ratings on Friday said that the funding gap for the non-banks is expected to further increase to Rs 15,000-25,000 crore.
“A 50% response in the first tranche of bids for RBI’s TLTRO 2.0 indicates that banks are hesitant to take fresh exposures to the sector, particularly to small and mid-sized NBFCs including MFIs, at this juncture,” the rating agency said. Hence, the refinance window of Rs 50,000 crore through government financial institutions such as Sidbi assumes significant relevance, it added. As collections from borrowers are likely to be limited in the April-May period, the lack of alternative funding lines would have serious implications for the sustainability of the NBFC sector.
On analysing the top 11 retail NBFCs in India, the estimated funding gap for the companies in Q1FY21 stands at Rs 10,000-20,000 crore with the expectation of moratorium availability from banks. Meanwhile, without a moratorium or partial moratorium from banks, the funding gap will rise further to Rs 15,000-25,000 crore.
The gap for the aggregate sector, including MFIs in Q1 will be much higher at around Rs 50,000 -60,000 crore based on broad estimates, the rating agency said.
Following the risk aversion in the banking sector, it said that fresh funding or refinancing to the NBFC sector from TLTRO 2.0 is unlikely to exceed Rs 10,000 crore unless there is a significant change in the banks’ response in the second tranche.
Sidbi, which has been allotted Rs 15,000 crore, has already announced schemes to provide liquidity support by extending short term loans to NBFCs and MFIs. While the refinance facility will be available to small and mid-sized lenders in the sector who provide loans to MSMEs, they need to be rated in the investment grade with a minimum net worth of Rs 20 crore and with capital adequacy above the mandatory levels. “This may provide some short term relief to the sector and enable some of the players to sustain their operations for another three months. However, if collections don’t revive rapidly for the NBFCs and MFIs in particular within this period, the liquidity challenges may continue and will necessitate longer term funding,” the firm said.
Suman Chowdhury, chief analytical officer, Acuité Ratings & Research, said that the rating agency expects a significant liquidity challenge for the mid-rung NBFCs with assets under management (AUM) in the range of `5,000-50,000 crore. “While large NBFCs with AUMs of over `50,000 crore may still continue to get fresh funds through TLTRO and even directly from banks and other domestic investors, there is a risk of a liquidity crisis in the mid segment of the NBFC sector if these players are not able to access alternative funding sources,” he said.
In order to prevent any solvency crisis in the sector, the agency said that RBI may consider a direct medium term financing window for the sector with appropriate terms and conditions or can consider a much higher refinancing line for financial institutions like Sidbi. “Additionally, the government may explore providing a first loss guarantee up to a defined level for additional exposures of banks through TLTRO to address the credit concerns, as has been provided for securitisation transactions in the previous year,” the rating agency said.