Finance Industry Development Council (FIDC) has written to the Finance Minister Nirmala Sitharaman seeking measures to improve liquidity support for small and mid-sized non-banking financial companies (NBFC) in the FY22 Union Budget.
In its letter, the industry body noted that although the government has taken a number of steps to provide liquidity support to NBFCs over the past two years, small and medium-sized NBFCs continue to face challenges on the liquidity front.
It said that all the small-sized NBFCs, and also a large number of medium-sized NBFCs, do not access capital market due to the complexities in compliances to various rules and regulations. They do not issue bonds, debentures or commercial papers and instead borrow by way of ‘term loans’ secured against their receivables, from banks and FIs like SIDBI and NABARD.
“This single factor has ruled these companies out of contention for availing funding under the TLTRO 1.0 & TLRO 2.0 of RBI and PCG 2.0, SPL (Special Liquidity Scheme) of Ministry of Finance as all these schemes entailed investment by banks and SPV in bonds/CPs issued by NBFCs,” it said.
FIDC also noted that all the schemes announced by the RBI and the government have prescribed a minimum credit rating as an eligibility criterion for NBFCs and the rating model which is followed by all the accredited credit rating agencies entails “size” as an important parameter.
All the credit rating agencies use the same scale to rate both large and small NBFCs. In such a scenario, as per the industry body it would be practically impossible for a small-sized NBFC to get the desired level of credit rating despite a sound balance sheet and excellent track record.
It has suggested that parameters like capital-to-risk weighted assets ratio (CRAR), asset quality (NPA levels), profitability and experience and understanding of the management should be given due weightage in deciding the eligibility of NBFCs to avail funds.
The letter written by Mahesh Thakkar, Director General of FIDC also recommended that the funding to NBFCs must be provided for tenure of at least 36 months, as they need to borrow for a commensurate period in order to avoid creating an asset liability mismatch.
It has also suggested the setting up of a dedicated refinancing body for NBFCs.
FIDC also suggested the Finance Minister that a special carve out for small and mid-sized NBFCs should be made within overall sectoral cap, like the way RBI has done for several sub-sectors within overall 40 per cent priority sector lending (PSL).
Thakkar mentioned that in 1999 RBI had allowed all bank lending to NBFCs for on-lending to the priority sector, to be treated as priority sector lending by banks.
This gave a huge incentive to banks to lend to NBFCs, he said, adding that while it ensured sufficient bank funding to NBFCs at a reasonable cost along with facilitating banks to meet their PSL targets, but it was withdrawn in 2011.
However, RBI restarted this arrangement recently, but only up to March 31, 2020 and on a very limited scale, only up to 5 per cent of PSL by banks. There is also an artificial cap of Rs 20 lakh per loan put on such on-lending transactions which may kindly be done away with, the letter said.
“The arrangement of treating bank lending to NBFCs for on-lending to priority sector to be treated as PSL for banks, should be made permanent and the limit needs to be increased to at least 10 per cent of total priority sector lending (PSL) by banks,” the letter said.