Bidding by banks at the first auction under the Targeted Long-Term Repo Operation (TLTRO) 2.0 on April 23 for ₹25,000 crore may not be encouraging due to the stipulation on the deployment of funds, according to India Ratings (Ind-Ra).
Given that non-banking finance companies (NBFCs), especially those not rated at the highest end of credit rating, were not able to access the funding from banks under the TLTRO (1.0) facility (announced on March 27, 2020), the RBI announced TLTRO 2.0 on April 17.
TLTRO 2.0 is aimed at channelling liquidity to small and mid-sized corporates, including NBFCs and micro-finance institutions (MFIs), that have been impacted by Covid-19 disruptions.
Deployment of funds
However, the RBI has clearly stipulated that funds availed of under TLTRO 2.0 should be deployed in “investment grade” bonds, commercial paper (CP) and non-convertible debentures (NCDs) of NBFCs.
Further, at least 50 per cent of the total funds of ₹50,000 crore has to be deployed by banks in securities/instruments issued by MFIs and NBFCs.
Specifically, banks have to deploy 10 per cent of the resources raised under TLRO 2.0 in securities/instruments issued by MFIs; 15 per cent in securities/instruments issued by NBFCs with asset size of ₹500 crore and below; and 25 per cent in securities/instruments issued by NBFCs with assets size between ₹500 crore and ₹5,000 crore.
Pankaj Naik, Associate Director, Ind-Ra, said: “Public sector banks may take that incremental exposure on these entities with limited participation from their private peers. Lower rated investment grade entities have negligible access to capital markets and banks would be mindful of the fact that these instruments are likely to carry minimal liquidity.”
The pricing on these loans, therefore, could be elevated and NBFCs that are sanctioned funds through this window may have to make a difficult choice between the quantum of liquidity and the cost of liquidity, he added
Naik observed that: “NBFCs with near-term liquidity pressure may borrow at a higher price, knowing well that it would hit their spreads. NBFCs with adequate liquidity buffers may choose to wait and allow the dust to settle down.”
Absorbed by PSBs
Referring to TLTRO 1.0, Ind-Ra, in a note, underscored that so far, only a part of the corpus has been deployed and it has largely been absorbed by public sector entities, and “AAA” rated and higher end of “AA” rated companies.
“Many of these corporates are raising this debt to not only tide over short-term liquidity challenges but also strengthen their liquidity buffers. This has resulted in NBFCs, especially those not rated at the highest end of credit rating, not being able to access the funding.
“The situation has aggravated, as several banks have not been accommodative in providing a moratorium to NBFCs while the latter have already provided a moratorium to their customers,” the note said.
While the RBI has specified how banks have to apportion funds for at least 50 per cent of the amount raised by them under TLTRO 2.0, it has not specified any criteria (as to the kind of entities that should benefit) for the remaining the funds (₹25,000 crore).
Ind-Ra said in the TLTRO 1.0 window, most of the funding was absorbed by public sector entities and bigger corporates.
“In line with that, the ₹25,000 crore may be absorbed by the top rated (AAA and AA+) NBFCs (under TLTRO 2.0). This may create challenges for NBFCs in the lower end of AA category curve,” it added.