Last April 17, the central bank announced a Rs 50,000-crore focused liquidity injection through what it calls a new model of its targeted long-term repo operations (TLTRO 2.0) aimed solely at small and medium non-banking financiers, housing finance companies and micro-lenders.
"Our own survey shows that only 12 members, one with 'AA' and 11 with 'A', have investment grade ratings, and, therefore, they are the ones who are most likely to get the money under TLTRO 2.0," Micro Finance Institutions Network (MFIN) Chief Executive Harsh Shrivastava told PTI. MFIN is a self-regulatory organisation (SRO) of NBFC-MFIs.
The rest of the players have either BBB/BB or lower ratings, he added.
Shrivastava, however, welcomed the TLTRO 2.0 saying it can help large micro-lenders with investment grade ratings to get cheaper funds.
Of the 52 MFIs, 21 are large with a portfolio of over Rs 500 crore, 19 are mid-sized with a loan portfolio of Rs 100-500 crore and 12 are small ones with under Rs 100 crore loan book, he said.
Typically, debt instruments with AAA rating carry the lowest credit risk, thus have the highest degree of safety regarding servicing of financial obligations.
A 'BBB-' is the lowest investment grade rating on a debt instrument that can attract investments.
And, any rating below this is riskier debt and thus attracts higher coupons, given the inherent risks the issuer faces in meeting debt obligations.
The RBI will conduct the first auction for the three-year TLTRO 2.0 for Rs 25,000 crore on April 23 at 4.40 per cent.
The funds availed under TLTRO 2.0 will have to be deployed in investment grade bonds, commercial papers and non-convertible debentures (NCDs) of non-banking financial companies (NBFCs) and at least 50 per cent of the fund should go to small and mid-sized NBFCs and micro-finance institutions (MFIs).
Of the 50 per cent, 10 per cent or Rs 5,000 crore will have to be invested in debt issued by MFIs, 15 per cent into debt issued by NBFCs with an asset size of Rs 500 crore and below and 25 per cent in securities issued by NBFCs with assets size between Rs 500 crore and Rs 5,000 crore.
The deployment of funds availed under TLTRO 2.0 in the primary market cannot exceed 50 per cent of the amount availed of, the RBI had said last Friday announcing the liquidity window.
According to India Ratings Director Prakash Agarwal, "Small and medium NBFCs have limited presence in the capital market and thus investments through secondary market transactions are not feasible for them." NBFCs with an asset size between Rs 500 crore and Rs 5,000 crore generally have BBB/A-rating though may have weaker liquidity and other buffers than higher-rated issuers.
With a large segment of NBFC customers likely to be significantly hit by the COVID-19 lockdown, delinquencies can disproportionately rise for them with weaker collections, impacting their overall liquidity.
"Thus, banks' risk appetite to take additional exposures on NBFCs through their debt, in the absence of any credit guarantee support, that too for a long three-year period, remains to be seen," Agarwal pointed out.
It can be even more challenging for NBFCs with a balance sheet size of under Rs 500 crore, especially as a large number of them will not have investment grade ratings.
According to rating agency ICRA, only 23 MFIs or around 60 per cent of the industry, have investment grade ratings.
Shrivastava also said MFIs may face challenges in issuing bonds or commercial papers during the COVID-19 lockdown period and that "for others who have BB or lower ratings, giving moratorium is still the simplest and fastest way to get money".
On Sunday, State Bank of India Chairman Rajnish Kumar had said banks could support NBFCs/MFIs by helping them issue bonds that can be funded through the TLTRO scheme.
Kumar also said he was even ready to provide liquidity to those MFIs that don't have an investment grade rating, if they have a good credit history.
"If MFIs are not eligible for bonds because they do not have the required investment grade ratings, then we may be comfortable giving loans to them on the basis of their credit history," Kumar had said.
NBFCs and MFIs have been demanding that banks extend the three-month moratorium announced by the RBI on March 27 to them.
Despite not getting a moratorium from banks, MFIs have extended the same to their borrowers.
Many analysts have said that in the absence of moratorium, these micro lenders can face severe liquidity challenges, which would affect their debt servicing capability.
The last week's meeting of the Indian Banks' Association (IBA) to decide on granting loan moratorium to NBFCs and MFIs was inconclusive as lenders could not come to a consensus.
IBA will now approach the RBI to seek some clarification on the issue.