NBFCs call for long-term loan and bond guarantees

MUMBAI: Non-bank lenders want the government to revise the terms of the Rs 75,000 crore package to help the industry, saying that the sovereign guarantee available for loans and bond sales should be for a longer duration. Finance Industry Development Council (FIDC), an industry body for NBFCs, has written to finance minister Nirmala Sitharaman highlighting the concerns that need to be addressed.

The lenders want a long-term window of at least three years to access credit as they prepare for new loan expansion post the lockdown. Most are set to resume new lending beginning June, ET reported on May 19.

“The government should reconsider the modus operandi of the stimulus to make funds available to NBFCs for long term, say three years,” said Ramesh Iyer, MD of Mahindra Finance.

Nervousness in secondary market
“The modalities of the relief package will help NBFCs discharging short-term liabilities,” he said.

Below triple A rated corporate bond yields were little changed on Thursday, a day after the government unveiled the terms of the Rs 30,000 crore package to increase liquidity and reduce borrowing costs for struggling non-bank lenders. It also announced details of the Rs 45,000 crore partial credit guarantee scheme (PCGC) under which the government will provide a 20% first loss guarantee to public sector banks to buy debt of non-bank lenders and housing finance companies rated double A or below.

On Thursday, these companies were able to raise new money at reasonable rates but there was nervousness in the secondary market with similar maturity papers of the same companies quoting at higher yields. Piramal Enterprises raised Rs 500 crore Wednesday offering 8.55% with three-year maturity. Tata Housing, Indostar Capital, Tata Motors Fin, ICICI Home Finance, Indiabulls Finance and HDFC Ltd, the largest mortgage lender, are other non-bank lenders which have raised new money at no unusual cost.

The lenders are unhappy because the government has limited the scope of both packages saying that the Rs 30,000 crore package will only be applicable for short-term, investment grade papers of up to 3 months.

“The government may please consider making long funds available with NBFCs to enable them to start fresh lending to stimulate the economy,” said Umesh Revankar, managing director, Shriram Transport Finance. “Even as we start preparing for post-lockdown new lending, this is unlikely to facilitate our business,” he added.

The Rs 45,000 crore PCGC scheme covers only debt from nine to 18 months which, bankers say, does not address the problem. “Housing finance companies, for example, typically issue paper for three years or more. This restriction in tenure will limit banks' ability to buy because there is little supply in the market for this time frame,” said a senior public sector bank executive.

Rating agency ICRA said the revised guidelines may not immediately improve liquidity profile of the NBFCs as investors may be cautious of certain asset classes given the majority of the retail loans are under moratorium and the trend in collections after the moratorium remains unclear. The 20% government guarantee also could be inadequate in the post-Covid environment, the agency said.

“The PCG continues to remain valid for only two years which reduces its utility when the underlying loans typically have a tenure anywhere between 3-5 years for car loans, truck loans, business loans etc. and 15-20 years for home loans,” ICRA said.

NBFCs offer long-term money of 3-5 years to MSMEs for business expansion and working capital needs. In order to maintain a healthy asset-liability matching, NBFCs also borrow for average tenures of three-five years, FIDC said.

“NBFC liquidity should be at least for a year, just a refinancing window allowing secondary investment is likely to benefit existing investors of NBFC bonds with government guarantee and do no good to the NBFCs or the economy,” said Nirmal Jain, chairman of IIFL group. “The first loss guarantee of 20% under PCG scheme must be at portfolio level (not at issuer level) to help regain bank confidence,” he added.

“The pandemic has hit everyone hard and NBFCs have provided moratoriums to customers,” said Rashesh Shah, chairman at Edelweiss Group. “The govt schemes are very timely and we would like the norms to facilitate long-term funding for NBFCs and their customers. The govt has been proactive and we hope they will address our concerns,” he said.