FM has leveraged banks and PSUs to deliver the goods

The Prime Minister boosted market confidence by announcing on Tuesday a Rs 20 trillion package. The composition of the same was always going to be a point of interest. The economic relief package was expected to be in some tranches, and hence, the Finance Minister (FM) will have something for the market players in the next couple of days. The FM has spoken of 15 odd measures in Round 1 with focus on micro, small and medium enterprises (MSMEs), non-bank finance companies (NBFCs) and power sector, which is significant. This is in keeping in mind both the importance of the tenet of ‘Make in India’ and going local.
The credit angle is interesting for them as the Rs 3 trillion to be disbursed by banks would go as collateral free debt for four years with a 12-month moratorium. This will help them to access funds to meet requirements for payment of salaries and raw materials. For the units under stress, Rs 20,000 crore support is to be provided as subordinate debt. The ones which are viable, Rs 50,000 crore of equity infusion is to be created from a fund of funds, or Rs 10,000 crore, so as to enable them to grow and get listed on SME exchanges. Hence, the flow of funds will improve for the SMEs. It would, however, need to be seen whether banks would go beyond the priority sector stipulation over here, as there are loans being given even today to the SMEs under MUDRA, and hence the delta involved would be interesting to watch.
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The alteration of the definition of MSMEs is definitely good for them. So far, there was an incentive to remain small due to the benefits to be drawn by being so classified. However, now they could grow to higher levels as specified, which will help to build scale. On-time payments will help them to get their dues from government agencies.
The other big announcement pertains to the NBFCs, which do not have a good rating. For this, there are two measures. The first is guaranteeing Rs 30,000 crore of debt and giving 20 per cent first loss guarantee of Rs 45,000 crore. These, as can be seen, would be contingent liabilities for the government and hence not really add to the fiscal deficit until invoked.
The third big measure is for Discoms for Rs 90,000 crore, which will be funded by Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC) against receivables of these distribution companies. This move will ensure that the Discoms can make payments to their suppliers, which would be the generators and transmission companies. Hence, this is good move for the power ecosystem.
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These two big measures would involve around Rs 3 trillion from banks, Rs 30,000 crore from the budget for subordinate debt and equity support (it can be assumed that Rs 40,000 crore of the Rs 50,000 crore would be funded by private players), and Rs 75,000 crore as contingent liability. The third is being supported by the public sector undertakings (PSUs), which would probably have to use their reserves or borrow from the market. Given their good credit rating, they would be in a position to do so at a lower cost. Quite clearly, these big measures have been kept outside the direct ambit of the Budget as of now and involves other agencies like banks and PSUs providing the funding.
Given that around Rs 7.5 trillion of relief was provided by the Reserve Bank of India (RBI) and government earlier, the balance Rs 12.5 trillion was to be expounded on. Wednesday’s measures are for around Rs 5.85 trillion (including Rs 50,000 crore in TDS, which is not a give-away as it has to be paid at the end of the day). Another Rs 6.5 trillion or so would probably be announced over the next few days. We need to wait and watch.

Govt issues guidelines for Rs 1 trillion partial guarantee scheme for NBFCs

The Centre has issued guidelines on operationalising Rs 1 trillion partial guarantee scheme under which public-sector banks can purchase high-rated pooled assets of financially sound non-banking finance companies (NBFCs).
NBFCs, including housing finance companies (HFCs), came under stress following series of defaults by the group companies of IL&FS in September last year.

To help the sector come out of the stress, Finance Minister Nirmala Sitharaman in the Budget announced support for fundamentally sound NBFCs in getting continued funding from banks.
"For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 trillion during the current financial year, the government will provide one-time six months' partial credit guarantee to public sector banks for first loss of up to 10 per cent," she had said.
In pursuance of that the finance ministry last week released a detailed guidelines for this with the objective to address temporary asset liability mismatches of otherwise solvent NBFCs/HFCs without having to resort to distress sale of their assets for meeting their commitments.
The partial guarantee would help rework the Asset Liability structure within three months to have positive Asset Liability Management in each bucket for the first three months and on cumulative basis for the remaining period.
"At no time during the period for exercise of the option to buy back the assets, should the CRAR (capital to risk weighted assets ratio) go below the regulatory minimum. The promoter shall ensure this by infusing equity, where required," an official statement said.
As per the guidelines issued, the window for one-time partial credit guarantee will be for a period of six months, or till such date by which Rs 1 lakh crore assets get purchased by banks.
Assets originated up to March 31, 2019 will only be eligible under this scheme, it said, adding assets should be standard in the books of NBFCs/HFCs on the date of sale.
It further said that the pool of assets should have minimum rating of 'AA' or equivalent at fair value prior to the partial credit guarantee by the Government of India.
Each account under the pooled assets should have been fully disbursed and security charge should have been created in favour of the originating NBFCs/HFCs and they can sell up to a maximum of 20 per cent of their standard assets as on March 31, 2019 subject to a cap of Rs 5,000 crore at fair value.
According to the guidelines, the rated assets shall be purchased by banks at fair value.
One-time guarantee provided by the government on pooled assets will be valid for 24 months from the date of purchase and can be invoked on the occurrence of default as outlined under heading 'D' below, it said.
The guarantee shall cease earlier if the purchasing bank sells the pooled assets to the originating NBFC/HFC or any other entity, before the validity of the guarantee period, it added.
It further said that the purchasing banks may have service level agreements with the originating NBFCs/HFCs for servicing, including administration of the individual assets.
The NBFCs/HFCs can have the option to buy back their assets after a specified period of 12 months as a repurchase transaction, on a right of first refusal basis, it said.
With regard to eligibility criteria, the guidelines said that the NBFCs registered with RBI HFCs registered with National Housing Bank (NHB) under the National Housing Bank can take benefit under the window.
The CRAR of NBFCs/CAR of HFCs should not be below the regulatory minimum of 15 per cent for NBFCs and 12 per cent for HFCs and net Non-Performing Asset should not be more than 6 per cent as on March 31, 2019.
They should have made a net profit in at least one of the last two preceding financial years (i.e. FY 2017-18 and 2018-19).
"The purchasing bank can invoke the guarantee if the interest and/or instalment of principal remains overdue for a period of more than 90 days (i.e. when liability is crystalised for the underlying borrower) during the validity of such guarantee, subject to the condition that the guarantee is for the first loss up to 10 per cent," it said.
For availing the window, it said NBFCs/HFCs will pay a fee equivalent to 0.25 per cent per annum of the fair value of assets being purchased by the bank to the government for providing guarantee.
There should be a process of real time reporting of such transactions by the banks to the government and to get the information on remaining available headroom for purchase of such pooled assets, it said.
The Department of Financial Services (DFS), the Ministry of Finance would obtain the requisite information in a prescribed format from the PSBs and send a copy to the budget division of DEA and the government will settle such claims by the banks within 5 working days from the date of claim.

New sectoral caps to hit NBFCs, says Kotak Institutional Equities

Market regulator the Securities and Exchange Board of India has reduced the sectoral caps for debt mutual funds to 20 per cent from 25 per cent. It has also reduced the additional exposure limit allowed in case of housing finance companies (HFCs) to 10 per cent from 15 per cent. These changes, however, may not have an immediate impact for the mutual fund industry but will “significantly reduce the financial flexibility” of non-banking finance companies (NBFCs), says Kotak Institutional Equities.
MFs exposure to non-banks (including PFC and REC) has declined to 36 per cent in May 2019 from 39 per cent in September 2018. Excluding PFC and REC, the ratio was 28 per cent in May 2019, in line with the new effective cap of 30 per cent. Within this, the exposure to NBFCs was 18 per cent and HFCs was marginally higher than the new cap at 11 per cent,” says a note by the brokeage.

“NBFCs make concerted efforts to diversify funding avenues from banks to mutual funds, insurance companies, foreign borrowings, retail bonds in order to optimize funding costs as well as reduce dependence on any single source. The new regulations will structure reduce the leeway for NBFCs especially in the backdrop of the recent Sebi regulation that prescribed large borrowers to raise 25 per cent of incremental borrowings from bond markets from FY2022,” the note added.