Guarantee scheme eases NBFC loan woes

Mumbai: A massive government-cum-Reserve Bank of India effort to increase loan flow to low-rated non-bank lenders appears to be paying off. Public sector banks are estimated to have disbursed ₹30,000 crore in the past few months to non-triple-A non-bank lenders under the second instalment of the Partial Credit Guarantee Scheme as risk aversion wanes and confidence returns.
This money (out of ₹45,000 crore earmarked for non-bank lenders) is on top of the ₹55,000-crore effort launched by both the government and RBI since April to reduce costs and increase loan flow to troubled and stressed non-bank lenders.

Interest rates for non-triple-A non-bank lenders have dropped and the yield spreads on AA+ rated bonds over similar maturity government securities softened to 104 basis points (bps) in the end of July from 307 bps in late March, RBI data shows. The gauge on AA bonds narrowed to 142 bps from 344 bps over the same period.

“As long as the government extends guarantee, banks feel comfortable to lend under the PCG,” said Umesh Revankar, MD at Shriram Transport Finance. “This helps the whole supply chain, ensuring liquidity... We see business normalcy returning gradually,” he said.

ECL Finance, Indiabulls Housing Finance, Piramal Capital, IIFL Finance, Shriram Transport and Cholamandalam are among those who have benefited from the disbursement, bankers said.

Piramal Capital, Cholamandalam did not reply to ET’s query.

“The second version of the partial credit guarantee scheme has worked well for all non-triple-A rated NBFCs, releasing funds for them,” said Rashesh Shah, chairman at Edelweiss Group. “The scheme’s success is now quite visible unlike its first version. This, in turn, helped resume businesses for NBFCs,” he added.
The scheme’s first version announced last year by finance minister Nirmala Sitharaman in the budget and worth ₹1 lakh crore was not very effective with very little money getting disbursed. The guarantee was also up to only 10%. The new design does not prompt shadow lenders to sell assets at distress prices and is designed to aid weaker NBFCs desperately seeking cash amidst economic uncertainty caused by Covid-19.

“In particular, market financing conditions for NBFCs, which had become challenging, have largely stabilised in the wake of targeted policy measures,” said RBI governor Shaktikanta Das in the latest bi-monthly credit policy.

The Reserve Bank conducted Targeted Long Term Repo Operations (TLTROs), a dedicated liquidity window for non-bank entities both in March and April. The first tranche was for ₹1 lakh crore, but most of the funds went to top-rated NBFCs.

To maintain adequate liquidity in the system, the central bank decided to carry out additional TLTROs for ₹50,000 crore in tranches of appropriate sizes for NBFCs and microfinance institutions in April. Banks were mandated to invest half (₹25,000 crore) of the second TLTRO into small, mid-sized NBFCs and MFIs. In May, the government also announced a fully guaranteed, ₹30,000-crore bond-buying programme for non-bank lenders, housing finance firms and micro lenders.