Swiftly Implement Economic Stimulus to Benefit NBFCs: India Ratings

In order to resolve the operational challenges and start the economic recovery process, Rating agency India Ratings and Research made a suggestion for speedy implementation of the recently announced economic stimulus. Calling this package if implemented in an efficient and speedy manner, would be key to benefiting non-banking financial companies (NBFCs) and micro, small and medium enterprises (MSMEs).

According to the agency, the stimulus package announced by the government includes multiple measures aimed at providing relief to NBFCs and MSMEs, which is their target borrower segment.

"However ironing out operational challenges and speedy implementation would be key to avoid restricting the benefits to the targeted segment", the ratings agency said.

As per the ratings agency, the Rs 300 billion special liquidity scheme (free of guarantee cost) can incentivise banks to take exposure in the lower rated investment grade NBFCs.

Moreover, banks would be able to have slightly better pricing on these loans, notwithstanding them being proposed to be backed by a government guarantee, on account of the lower bargaining power of the lower-rated NBFCs," the agency said.

"Having said that, lower rated NBFCs are not active in the bond market and hence investments through non-convertible debentures could create challenges."

For the MSMEs, the Centre has planned a Rs 500-billion equity infusion through the fund of funds route. This is aimed at increasing the capacity of viable MSMEs.

"This route of assisting MSMEs may be time-consuming as it could involve a valuation exercise regarding the quantum of stake that could be purchased. Given the urgent need of funds for the sector, the modalities of the equity infusion can be time-consuming," the ratings agency said.

"The INR 450-billion partial credit guarantee scheme with 20 per cent first loss protection from the government is aimed at providing some incentive to lenders. Unlike the earlier scheme which was meant only for direct assignment transactions, this scheme now covers even primary borrowings by NBFCs such as bonds and commercial papers."

In addition, Centre has announced collateral-free loans worth Rs 3 trillion for MSMEs (up to INR 0.25 billion outstanding credit and turnover of up to INR 1 billion) and will provide a 100 per cent guaranteed cover on them.

However, MSMEs may continue to face the pain if the lockdown persists for a longer time and resumption of business operations gets delayed, the agency added.