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Published on 1/06/2020 4:13:31 PM | Source: Motilal Oswal Financial Securities Ltd

NBFC Sector - Cabinet approves recent relief measures for NBFCs/MSMEs by Motilal Oswal

Posted in Broking Firm Views - Sector Report| #NBFC #Sector Report

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Cabinet approves recent relief measures for NBFCs/MSMEs

Special Liquidity Facility for NBFCs restricted to <3months – a negative surprise

The Cabinet Committee on 20th May’20 approved some of the government’s proposals announced last week. The Special Liquidity Facility restricted to less than 90 days is a negative surprise. The MSME guarantee scheme is to be implemented through an SPV structure. We believe that corpus under the Partial Credit Guarantee scheme of INR100b may not be sufficient to address the issues faced by the sector and to get risk appetite of banks back. While all the schemes would partially address near-term liquidity challenges of NBFCs/MSMEs, in our view, medium-term funding challenges for NBFCs still remain.

 

Special liquidity window for NBFCs/HFCs only for short-term borrowings

The Indian government (GoI) has set up an SPV structure to raise money from the RBI (with GoI’s guarantee). The SPV, in turn, would invest up to INR300b in shortterm securities (residual maturity up to 3 months) of investment-grade NBFCs and HFCs. In the fine print, restriction of the scheme only to short duration paper is a disappointment. Recently, we have witnessed NBFCs with good parentage getting funds at significantly lower cost in the Commercial Paper market. In our coverage universe, all entities are well placed to take care of liability repayment (despite factoring in high moratorium on the asset side and no moratorium benefit on the liability side) at least from the next three months’ perspective with available liquid assets on the balance sheet. In our view, while the GoI is seeing the current situation as a liquidity issue (and hence, matching SLF’s tenure somewhat to the moratorium period), the real concern – risk appetite of lenders – remains. Giving money to NBFCs only for a shorter duration exposes lenders to rollover risk and ALM mismatch, even for new originations.

INR3t emergency line to MSMEs available till 31st Oct’20 through SPV structure

According to this scheme, banks and NBFCs can provide an emergency credit line to MSMEs up to 20% of their outstanding credit as at 29th Feb’20. This is subject to (a) total indebtedness of the MSME up to INR250m, (b) INR1b or below turnover of the MSME, and (c) MSMEs not being overdue on loans for more than 60 days. The maximum amount that MSMEs can take under this facility is INR250m. The tenor of the loan is 4 years with a moratorium on principal repayment in the first year. Note that the 100% guarantee coverage will be provided by the National Credit Guarantee Trustee Company Limited (NCGTC). The interest rate is capped at 9.25% for banks (to be taken as working capital financing) and 14% for NBFCs (term loans).

 

Guarantees to kick start credit cycle for MSME lending

Full guarantee on incremental 20% credit flow (to take care of operational expenses) to exiting exposures with moratorium on principal should help the MSME space tide over the liquidity issue. We are not sure about the corpus of just INR416b as against the total guarantee amount of INR3t, and hence, we await full operational details of the scheme from the NCGTC. In our view, two important points need to be considered: (a) it is a big relief to genuine cases, otherwise liquidity problems could have turned into a credit problem, and (b) for cases that are facing business risk i.e. are unviable even after providing liquidity, credit risk may get pushed to a year down the line and would increase risk in the balance sheet. Based on existing moratorium schemes, there was a high likelihood of MSMEs’ NPAs surging. This is because businesses would take time to return to normalcy, especially given the weak demand and issue of migrant workers. The scheme would definitely boost credit flow to the MSME segment.

 

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