TLTRO 2.0: Banks scupper RBI plan to offer special liquidity to NBFCs as repo auction gets 50% bids
As feared by the industry and money market watchers, the first auction under the version two of the targeted long-term repo operations (TLTRO 2.0) on Thursday received a muted response from banks as the Reserve Bank received only a little over 50 percent bids for the Rs 25,000 crore on offer
Mumbai: As feared by the industry and money market watchers, the first auction under the version two of the targeted long-term repo operations (TLTRO 2.0) on Thursday received a muted response from banks as the Reserve Bank received only a little over 50 percent bids for the Rs 25,000 crore on offer.
The poor response also left the RBI worried, forcing it to make a public announcement -- a rare spontaneous regulatory reaction in recent years-- to review the mechanism.
The auction nearly failed as banks are not sure of the financial strength of the issuers and also due to lack of enough rated debt instruments from NBFCs and MFIs where banks can park these funds.
Moreover, lenders are becoming more and more risk-averse as the uncertainty arising from the COVID-19 pandemic has no end in sight.
The RBI received bids for just Rs 12,850 crore as against the notified amount of Rs 25,000 crore with a three-year tenor offered at 4.40 percent.
The subdued demand for the maiden TLTRO 2.0 auction, aimed at providing targeted liquidity support to small NBFCs and MFIs, has forced the RBI to review the issue.
According to Vydianathan Ramaswamy, a director at Brickwork Ratings, limited participation clearly highlights banks' reluctance to lend to small and mid-sized NBFCs and MFIs in the current situation.
“Given their lack of risk appetite, a structure with partial credit guarantee by the government, similar to the PCG scheme launched last year for securitization, maybe the only viable option to ease liquidity challenges of NBFCs,” he said.
He noted that NBFCs and MFIs are facing severe liquidity conditions as banks are very selective to give moratorium to them, while NBFCs and MFIs have already given moratorium to their borrowers.
“Poor response to the TLTRO 2.0 means there is no immediate liquidity relief for NBFCs and MFIs especially the smaller ones,” Ramaswamy said.
NBFCs and MFIs which are already facing liquidity challenges are being hit adversely by the COVID-19 pandemic and the resultant lockdown imposed to contain the infection.
“Total bids received amounted to Rs 12,850 crore, implying a bid to cover ratio of 0.5,” the central bank said. The number of bids received were 14, the RBI said, adding “it will review the auction results and take a view in the matter.”
On 17 April, the RBI had announced to conduct Rs 50,000 crore TLTRO 2.0 in tranches in its bid to offer durable liquidity to the sector that has been struggling ever since IL&FS went bankrupt in September 2018 due to fraud by the company management.
The funds availed under TLTRO 2.0 have to be deployed in investment-grade bonds, commercial papers and non-convertible debentures of NBFCs and at least 50 percent of the fund should go to small and mid-sized NBFCs and MFIs.
Of the 50 percent, 10 percent or Rs 5,000 crore will have to be invested in debt issued by MFIs, 15 percent into debt issued by NBFCs with asset size of Rs 500 and below, and 25 percent in securities issued by NBFCs with assets size between Rs 500 crore and Rs 5,000 crore, the RBI had said on April 17 announcing the special liquidity window.
Though banks are getting cheaper funds through TLTRO 2.0, they are not willing to invest in debt issued by NBFCs or MFIs in this volatile environment as most of them don't have investment-grade ratings or lack good financial metrics.
“Credit risks lie with banks and investing in a low rated company with whom you don't have any lending history will be difficult at this point of time,” said a treasurer of a bank.
Also, very few small NBFCs and MFIs are eligible to issue investment-grade debt, which limits banks capacity to deploy these funds.
“MFIs that can issue investment grade instruments are very few and far between. RBI has mandated to invest 10 percent of Rs 50,000 crore in bonds or CPs issued by MFIs but where will we get such investment grade instruments from them,” a senior state-run banker said.
According to the Microfinance Institutions Network (MFIN), only a dozen-odd of the 52 MFIs have investment-grade ratings and are thus eligible to issue debt instruments that can attract investments from banks under TLTRO 2.0.
“Our own survey shows that only 12 members, one with 'AA' and 11 with 'A', have investment-grade ratings, and therefore, they are the ones who are most likely to get the money under TLTRO 2.0,” MFIN chief executive Harsh Shrivastava had told PTI earlier this week.
The rest of the players have either BBB/BB or lower ratings, he had said.
While debt instruments with 'AAA' rating carry the lowest credit risk, those ones with 'BBB-' are the lowest investment grade which can attract investments.
According to rating agency Icra, only 23 MFIs or around 60 percent of the industry, have investment-grade ratings.
Bankers said small-sized NBFCs and MFIs never raise money through rated instruments and hence do not even know the process to issue debt instruments, which could be a challenge during this time when movements are restricted.
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