Strong regulatory guidance required to deal with NBFC lacuna, say sources

New Delhi, April 11 (IANS): The Covid-19 relief measures might cause massive defaults in the NBFC sector unless CRAs are allowed to properly grade these accounts and the regulator comes out with clear guidelines for the lacuna, sources said.

At present, regulations mandate NBFCs to provide moratoriums to customers while they have not been given the same facility with their lead bankers. This is expected to heavily dent the liquidity profiles of many NBFCs.

The lacuna lies in the fact that CRAs, whose job is to assess the asset quality and then these NBFCs are also mandated not to do so under the garb of Covid-19 measures.

Subsequently, CRAs have become weary about the situation and have recommended massive steps to save the sector, as no clear regulatory guidance has tied their hands.

Many CRAs are also restless for not getting into regulatory mess of Covid- 19 protection but are also aware of the past instance of the IL&FS, when they were blamed for not initiating downgrade actions.

Some have even called for clear regulatory guidance from Sebi, which is the regulator.

Sources in CRAs said: “CRAs are expected to follow their respective ratings criteria and the extant SEBI guidelines. While SEBI has given some flexibility to CRAs on default recognition during the Covid crisis, they may nonetheless, need to take appropriate and objective rating actions to reflect any significant deterioration in the business or liquidity profile of a rated entity.”

“The RBI moratorium may give short-term relief but the CRAs may need to look beyond to assess the overall impact.”

A recent report of rating agency CRISIL said that the liquidity cover available with CRISIL-rated non-banking financial companies will decline sharply if they cannot avail of their own bank borrowings the moratorium announced by the Reserve Bank of India in its “COVID-19 Regulatory Package”.

It noted that NBFCs face a double whammy because they are offering moratorium to customers despite not getting one themselves from their lender-banks. That will put significant pressure on liquidity profiles of many NBFCs, it added.

“CRISIL’s analysis of NBFCs shows liquidity pressure will increase for nearly a quarter of them if collections do not pick up by June 2020. These NBFCs have INR 1.75 lakh crore of debt obligations maturing by then,” it said.

Another rating agency Acuite Ratings has said that while the gross advances of the NBFC sector stood at INR 22.76 lakh crore as on March 31, 2019, retail NBFCs constituted INR 14.48 lakh crore or 64 per cent of gross advances and the selected 11 NBFCs together constitute 43 per cent of these retail NBFC portfolio as on March 31, 2019.

It noted that the loans of retail NBFCs are granular in nature and largely cater to self-employed borrower segment where the cash-flows highly are co-related to the economic activity levels and therefore, inherently more volatile as compared to that of salaried individuals.

“One important segment in retail NBFCs is new or used vehicle finance for transport operators, small businesses, farmers and self-employed individuals. Their lending portfolio also includes small and medium enterprises where the ticket size is higher, typically up to INR 5 crore. Clearly, the economic disruption brought about by the Covid lockdown will have a severe impact on the incomes of such borrowers for several months depending on the intensity of the outbreak,” said Acuite report.

Since the RBI has provided a three-month moratorium framework for banks and NBFCs, almost all retail NBFCs are expected to provide such a moratorium to their borrowers. While this is likely t o provide a temporary reprieve to the retail borrowers of the NBFCs, it is likely to have significant implications for their liquidity and businesses, it said.

Acuite’s analysis of the top 11 retain NBFCs in India highlighted that almost 60 per cent of their borrowings (excluding securitisation) are from non-bank sources and require continuity in debt servicing. It estimates the refinancing requirement for these 11 retail large NBFCs at around INR 10,000-20,0 00 cr. to avoid any challenges in their debt servicing and to sustain their operations.

Suman Chowdhury, Chief Analytical Officer, Acuite Ratings & Research, said: “The aggregated debt repayment including interest for the top 11 retail NBFCs in first quarter of FY21 is estimated to be between INR 40,000-60,000 crore while the cash reserves are estimated to be around Rs 45,000 cr. It is apparent that many of these NBFCs would find it difficult to manage their cash flows, including their operating expenses during the next 3 months unless they get access to additional bank lines or refinance.

Further, industry body FICCI has also suggested a special liquidity line to NBFCs from banks as well as a significant allocation from the TLTRO operations mandatorily flowing to the NBFCs.

In a presentation, FICCI recommended an additional 10 per cent loan by banks under a special Covid-19 program. An amount of 10 per cent of total borrowings as refinance against existing NCDs issued by the NBFC and HFCs, it said.

N.R. Bhanumurthy, Professor of National Institute of Public Finance and Policy, also said that NBFCs also require support as other segments, more so as they were already going through a liquidity crisis.

However, there are some concerns. Speaking to IANS, Chief Economist at HDFC Bank Abheek Barua said that currently, all the sectors which have genuine needs should be looked into and provided with relief, and merely sticking to NBFCs would not be beneficial for the economy.

“There are all sorts of claims on the government’s resources which are limited. Now it’s no longer about NBFCs, there are the MFIs (micro-finance institutions), then there are actual sectors like civil aviation, hospitality, part of the MSME sector which of course is funded partly by the NBFCs,” he said.