The evolving impact on people’s health has casted a threat on their livelihoods, the businesses in which they work, the wider economy, and therefore the financial system. The outbreak of this pandemic is nothing like the crisis faced by the economies in the year 2007-08 and imperils the stability of the financial system. The market conditions have forced traders to take aggressive steps exposing the system to great volatility thereby resulting in crashing asset values. Combating the pandemic and safeguarding the economy, the financial sectors across the globe have witnessed numerous reforms to hammer the aftermaths of the global crisis.
The financial and banking system across the globe have been guided to followed certain steps and directions issued by the regulators to cope up with the sudden surge in credit demand and in the meantime allowing some relief to the borrowers. To meet the ends the financial regulators across the globe have put in place various monetary and fiscal policies to balance the economy.
It is the country which stands as one of the most affected after China by the global health emergency. Struggling against the pandemic, it had announced a series of stringent measures focusing on the financial sector. Some of the measures aimed at the banking sector can be listed as:
- The Italian Banking Association announced a large-scale moratorium on debt repayment, including mortgages and repayments of small loans and revolving lines of credit. It aimed at loans taken out by companies until 31 January 2020.
- The National Institute for Promotion and the development finance institution increased the funding limit for the banking system. The scheme intended to provide subsidized loans to SMEs and mid-caps to support cash flow and investments.
- It directed banks to freeze credit lines, loans for advances on securities, short-term loan maturities and instalments of loans due are frozen until September 30, 2020.
- SACE, the Italian Export Agency, decided to guarantee bank loans made to large businesses, SMEs, contract workers and professionals.
- The Bank of Italy allowed banks to operate below the capital conservation buffer and liquidity coverage ratio (LCR).
The United States
Considered one of the pioneer economies, USA is scuffling against the crisis. Leading its own battle, the federal bank of the USA continues to take aggressive actions to protect its economy from the devastating situation. A few measures taken by the FRB to support the cash flow to households and businesses are discussed below:
- Relief in the filing of consolidated financial statements by entities. As per which no action shall be taken if the reporting requirement is adhered to within 30 days of the due date.
- Announced changes to the calculation of Credit Concentration Ratios for the Community Bank Leverage Ratio.
- Allowed banks to use their capital and liquidity buffers to extend loans to households and businesses.
- Announced Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.
- Announced a Money Market Mutual Fund Liquidity Facility (MMLF) that will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds.
- Information furnished to credit reporting agencies on an account of a consumer impacted by COVID-19. Such an account shall be reported as “current” or as the same status as before. Such credit protection is available beginning January 31 2020, and ending at the later of 120 days after enactment or 120 days after the national emergency is terminated.
- A moratorium on foreclosures of federally-backed mortgage loans for not less than 60 days beginning March 18, 2020.
- It suggested that short term modifications in loans shall not amount to Trouble Debt Restructuring
The magnitude of economic shock faced by the countries is uncertain. Governments across the globe are doing their bit to save their economies from collapsing. Meantime the Bank of England has taken several measures to contain its banking sector and continue to operate for the welfare of the people. Some measures of BoE can be enlisted as:
- Introduction of Coronavirus Business Interruption Loan Scheme (CBILS). According to this scheme, businesses up to a certain annual turnover can borrow interest-free loans for up to 12 months under the British Business Bank (BBB) scheme.
- Introduction of Corporate Finance Facility (CCFF). Through this facility funds to large businesses would be provided through the purchase of short-term corporate debt in the form of commercial paper.
- Lowering of interest rates on loans to 0.1%.
- Lowering of the capital that the banks had to set against their lending to businesses and households.
- Waiver of penalties on the breach of covenants by borrowers who in normal circumstances would have complied with the covenants.
- Banks have been directed to not pay dividends due or any new dividends to their shareholders.
European Central Bank
Global institutions like ECB, European Union, International Monetary Fund, OECD, United Nations and World Bank are also actively taking initiatives to mitigate the impact of the present situations on the economies. One such institution is ECB which has served several guidelines for regulatory authorities. Some of its suggested measures are as follows:
- It introduced a new Pandemic Emergency Purchase Program (PEPP) which seeks to provide relief to banks in order to boost loans to businesses and households, as well as to support production and employment by the purchase of T-bills and mortgage-backed securities.
- It expanded the use of credit claims as collaterals which would allow to accept loans with lower credit quality, loans to other types of debtors etc. Which is not provided in the ECB’s general framework.
- It lowered the level of the threshold for domestic credit claims to facilitate the mobilisation as collateral of loans from small corporate entities.
- It increased the maximum share of unsecured debt instruments issued by any single other banking groups, in a credit institution’s collateral pool. This aims to enable counterparties to benefit from a larger share of such assets.
- It allowed a waiver of the minimum credit quality requirement for marketable debt instruments for acceptance as collateral in Euro system credit operations.
- It permitted a temporary increase in its risk tolerance level in credit operations through a general reduction of collateral valuation.
Witnessing the robust measures adopted by the economies across the globe, India has also come up with its set of policies and guidelines leading the banking sector to contest the repercussions of the deadly pandemic. Concentrating on the shadow banking sector in India we shall delve into further discussing the various reforms benefitting the NBFC sector.
Indian regulatory reforms
NBFCs have been struggling to keep alive in wake of the pandemic. The financial regulator in India has been taking rigorous steps to counter the impact of the pandemic on the shadow banking sector. The central bank has been continuously tracking the sector in India and has taken a number of steps to support the NBFC sector in India and prevent its collapse. The steps include measures to maintain adequate liquidity in the system, facilitate smooth bank credit flow and ease financial strain amid the deadly virus outbreak. Some these have been introduced during the last quarter of the FY 2019-20 even before the actual outbreak of the disruption in our country.
Regulatory relief package:
The Reserve Bank of India came up with the ‘COVID Package’ on March 27, 2020. The package permitted banks to provide a moratorium on EMI repayments for a period of 3 months starting from the month of March. Further providing relaxation in classification of loan as NPAs and restructuring of terms. Referring to the ambiguity and issues with respect to ageing of defaults were dealt with by Delhi and Bombay high courts in their recent rulings. A detailed analysis of these ruling can be viewed here.
Post the extension of the lockdown, RBI came up with another series of circulars on April 17, 2020. The various relaxation announced by the RBI Governor included, an additional one-year extension of loans advanced to commercial real estate projects by NBFCs, an extension of the resolution plan by 90 days deferring the requirement of making additional provision of 20% after the expiry of extended resolution period and the granting asset classification standstill on account under moratorium.
Long Term Repo Operations & Re-financing:
The RBI also came up with LTRO and refinancing measures addressing the liquidity woes of the NBFC sectors through its circulars dated17 April 2020. The scheme invited LTRO from commercial banks, the proceeds of which shall be used for financing the banking sector. Proceeds equal to50% of the TLTRO kitty shall be extended to NBFCs and MFIs. There has also been a special refinancing facility of ₹ 50,000 crore that shall be provided by NABARD, SIDBI and NHB to meet the funding requirements of MFIs and HFCs by refinancing/on-lending. RBI conducted an auction on 23 April 2020 of the first tranche of TLTRO 2.0 amounting to ₹ 25 crores. However, subscription amounting to only 50% (approx) of the total amount were received.
Priority Sector Lending:
RBI through a circular dated February 23 2020, allowed classification of loans advanced by banks to NBFCs for the purposes of on-lending as PSL. An overall limit of 5% of the bank’s total PSL is allowable as bank credit to registered NBFCs and HFCs excluding MFIs for the purposes of on-lending. Limits up to which the credit is allowed are as follows:
- Agriculture: On-lending by NBFCs for ‘Term lending’ component under Agriculture are allowed up to ₹ 10 lakh per borrower.
- Micro & Small enterprises: On-lending by NBFC are allowed up to ₹ 20 lakh per borrower.
- Housing: Enhancement of the existing limits for on-lending by HFCs from ₹ 10 lakh per borrower to ₹ 20 lakh per borrower.
MSME loan restructuring:
RBI circular dated 11th February extended relief to the MSME sector, permitting the benefit of one-time restructuring of loan accounts of GST registered MSMEs. It further clarified that such restructuring would not tantamount to degradation of standard accounts that were in default as on January 1, 2020. The restructuring under the scheme has to be implemented latest by December 31, 2020.
The various measured or incentives provided by the RBI during the last quarter, particularly for the NBFC sector, has been summarised below:
|COVID19 Regulatory Package – Asset Classification and Provisioning
Dated: April 17, 2020
|The RBI clarified that for all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period.|
|COVID19 Regulatory Package – Review of Resolution Timelines under the Prudential Framework on Resolution of Stressed Assets
Dated: April 17, 2020
|The period for resolution plan shall be extended by 90 days. Consequently, the requirement of making additional provision of 20% shall be triggered as and when the extended resolution period expires.|
|Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Projects under Implementation
Dated: April 17, 2020
|In respect of loans to commercial real estate projects delayed for reasons beyond the control of promoters, date for commencement for commercial operations (DCCO) can be extended by an additional one year, over and above the one-year extension permitted in the normal course, without treating the same as restructuring.
Similar guidelines were issued to banks in February 2020, on deferment of date of commencement of commercial operations (DCCO) for projects in commercial real estate (CRE) sector.
|Targeted Long-Term Repo Operations 2.0 (TLTRO 2.0)
Dated: April 17, 2020
|The RBI shall conduct Targeted Long-Term Repo Operations (TLTRO) 2.0 at the policy repo rate for tenors up to three years for a total amount of up to ₹ 50,000 crores, to begin with, in tranches of appropriate sizes.
The funds availed under TLTRO 2.0 shall be deployed in investment-grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs).
At least 50% of the total funds availed shall be apportioned as given below:
· 10% in securities/instruments issued by MFIs;
· 15% in securities/instruments issued by NBFCs with asset size of ₹ 500 crore and below; and
· 25% in securities/instruments issued by NBFCs with assets size between ₹ 500 crores and ₹ 5,000 crores
Dated: April 17, 2020
|Provide special refinance facilities for a total amount of ₹50,000 crore to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs. This will 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; and ₹ 10,000 crores to NHB for supporting housing finance companies (HFCs).|
|COVID19- Regulatory package
Dated: March 27, 2020
|The circular enlists the following reliefs as a measure to mitigate the burden of debt servicing brought about by disruptions on account of COVID-19 pandemic and to ensure the continuity of viable businesses:
· Moratorium on Term Loans and Deferment of Interest on Working Capital Facilities
· Easing of Working Capital Financing
· Classification as Special Mention Account (SMA) and Non-Performing Asset (NPA)
|Priority Sector Lending – Lending by banks to NBFCs for On-Lending
Dated: March 23, 2020
|To extend the priority sector classification for banks, to include loans to NBFCs for on-lending for FY 2020-21. Bank credit to registered NBFCs (other than MFIs) and HFCs for on-lending will be allowed up to an overall limit of five per cent of individual bank’s total priority sector lending.
|Micro, Small and Medium Enterprises (MSME) sector – Restructuring of Advances
Dated: February 11, 2020
|The circular sought to extend the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST registered MSMEs that were in default as on January 1, 2020. The restructuring under the scheme has to be implemented latest by December 31, 2020.|
|Statement on Developmental and Regulatory Policies Long Term Repo Operations (LTROs) for Improving Monetary Transmission
Dated: February 6, 2020
|To conduct Long Term Repo Operations (LTROs) for one-year and three-year tenors for up to a total amount of ₹ 1,00,000 crores at the policy repo rate.|
|Interest Subvention Scheme for MSMEs
Dated: February 5, 2020
|The relaxations are disseminated by the RBI to banks only. However, it seems that there is no corresponding dissemination of the same in the case of NBFCs. Given the fact that the parent guidelines of MSME ministry themselves stood amended, it cannot be contended that the benefit of the relaxations will be limited to banks only.
The relaxations are logistic and information requirement connected- to ease out the compliance requirement by the MSMEs.
The regulator has taken measures to tackle the situation and is unequivocally committed to doing whatever it takes to steer the entire financial sector out of the storm. The framework, however, would need continuous revision to support credit growth needed for rebuilding the economy. RBI may consider to further expand the depth and breadth of the measures taken to provide a cushion against rainy days of financial stability risks.
Our other write-ups on NBFCs may be viewed here: http://vinodkothari.com/nbfcs/
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