The finance minister also announced a special liquidity scheme worth Rs 30,000 crore that will lead to fund infusion into investment grade debt papers of these firms.
The government on Wednesday announced the much-awaited partial credit guarantee scheme worth Rs 45,000 crore for low-rated non-banking finance companies (NFBCs), housing finance companies (HFCs) and microfinance institutions (MFIs) that were starved of cash due to credit risk aversion by investors in the wake of Covid-19 crisis.
Under this scheme, the existing partial credit guarantee scheme (PCGS) will be extended to cover borrowings, such as primary issuance of bonds/commercial papers of such firms, wherein the first 20% of loss will be borne by the government. The government said AA-rated papers and below, including unrated papers, will be eligible for investment.
The finance minister also announced a special liquidity scheme worth Rs 30,000 crore that will lead to fund infusion into investment grade debt papers of these firms. Under this scheme, investment will be made in both primary and secondary market transactions in investment grade debt papers. Securities will be fully guaranteed by the government. For implementation of this scheme, experts believe that the government is likely to form a special purpose vehicle (SPV) which will infuse funds into these papers.
Ananth Narayan, professor-finance at SPJIMR, said more needs to be done for stressed entities in these sectors.‘The government could form an SPV which will raise Rs 30,000 crore to invest in investment grade papers of NBFCs/MFIs/HFCs. This is a good figure which will provide the necessary support as the government is effectively taking on the full credit risk. Another scheme where the government has announced a partial credit guarantee will see a total liquidity of Rs 45,000 crore to AA-rated and below papers of which the government will provide a partial credit guarantee of 20% or Rs 9,000 crore. While this is welcome liquidity, solutions for stressed NBFC/HFC/MFI assets may also be needed,” Narayan said.
The risk aversion of investors to low-rated NBFC and MFI firms has been so high in recent times that banks only accepted half the money provided by the central bank under the first tranche of the targeted long term repo operations 2.0 (TLTRO 2.0). Market sources had explained that it was not in their appetite to invest in such papers as there was a potential of these entities seeing a rating downgrade due to higher NPAs in the current environment.
Vydianathan Ramaswamy, director – ratings at Brickwork Ratings, explained that NBFIs have been reeling with liquidity challenges as loan repayments by their borrowers have dipped by almost 40-80% since the lockdown was imposed.
gWith banks largely shying away from incrementally lending to this sector and the moratorium approvals coming far and few, many NBFCs were on the brink of a liquidity crisis, which could have culminated into these defaulting on debt servicing obligations. The aggregate allotment of Rs 75,000 crore of the Aatma Nirbhar package to NBFIs comes as a lifesaving liquidity booster shot for the NBFIs, especially for those in the lower investment-grade rating category. Currently, close to 40% NBFIs rated by Brickwork Ratings are in the ‘BBB’ and ‘A’ rating categories that will benefit the most from this package,’ Ramaswamy said.
Rashesh Shah, chairman and CEO of Edelweiss group, told a television channel that the first need of the economy has been liquidity. ‘The Rs 30,000-crore credit facility is very good and will help NBFCs. Only a third of the Rs 20 lakh crore have been used on Wednesday’s announcements,” Shah said.