Liquidity Boost to NBFCs

• 18 Apr 2020

Why in News

The Reserve Bank of India (RBI) has announced a host of measures to provide liquidity support to Non Banking Financial Companies (NBFCs), apart from giving them certain benefits for loans extended to the commercial real estate sector.

Key Points

• TLTRO 2.0
  
  • The RBI would conduct Targeted Long-term Repo Operations (TLTRO 2.0) for an aggregate amount of Rs 50,000 crore, in installments of appropriate sizes.
  • The banks have to invest the funds availed under TLTRO 2.0, in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs.
  • RBI stipulated that small and mid-sized NBFCs and Micro Finance Institutions (MFIs) should receive at least 50% of these funds.
  • The investments made by banks under this facility would be classified as ‘Held-to-Maturity’ (HTM), even in excess of 25% of the total investment permitted to be included in the HTM portfolio.
    
    • Held to Maturity securities are securities that companies purchase and intend to hold until they mature.
  • This will help in easing the liquidity problem faced by NBFCs and MFIs to some extent.
    
    • NBFCs are facing liquidity pressure since banks have not extended any repayment moratorium to these entities even if NBFCs have to provide the same for their borrowers.
• Refinance facility: The RBI has also decided to provide a special refinance facility of ₹50,000 crore to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB) to enable them to meet sectoral credit needs. This would comprise:
  
  • ₹25,000 crore to NABARD for refinancing Regional Rural Banks (RRBs), cooperative banks and Microfinance Institutions (MFIs).
  • ₹15,000 crore to SIDBI for on-lending/refinancing.
  • ₹10,000 crore to NHB for supporting Housing Finance Companies (HFCs).
• Extension of loans to the Real Estate Sector: The RBI has allowed extension of the loans by NBFCs to delayed commercial real estate projects by a year without restructuring.

Targeted Long-term Repo Operations

• LTRO is a tool that lets banks borrow one to three-year funds from the RBI at the repo rate, by providing government securities with similar or higher tenure as collateral.
• It is called 'Targeted' LTRO as in this case, the RBI wants banks opting for funds under this option to be specifically invested in investment-grade bonds.
• The TLTRO was introduced by the RBI to help companies, including financial institutions, manage their cash flow issues in the wake of the Covid-19 outbreak.

Note

• Investment-grade bond: It is a bond classification used to denote bonds that carry a relatively low credit risk compared to other bonds.
• Commercial Paper (CP) is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year.
• Non-convertible debentures: The debentures which cannot be converted into shares.

National Housing Bank

• NHB is a statutory organization that was established on July 9, 1988 under the National Housing Bank Act, 1987.
• It is the apex level financial institution for the housing sector in the country.
• It is a government-owned entity.
  • The governmnet took over the NHB from the RBI after buying entire stake of Rs. 1,450 crore in 2019.
  • The move follows the recommendation of Narasimham-II committee report of October 2001.
  • Earlier, RBI sold its stake in NABARD as well.
• NHB aims to facilitate the promotion of Housing Finance Institutions and provides financial and other support to such institutions.

Non-Banking Financial Company

• NBFC is a company registered under the Companies Act, 1956.
• It is engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.
• But, it does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
• A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
• Features of NBFCs
  
  • NBFC cannot accept demand deposits.
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.

Source: TH