Small and medium-sized microfinance institutions (MFIs) are planning to pool securities, with credit enhancement facility from external institutions, to avail credit from financial institutions under the targeted long-term repo operations (TLTRO 2.0) announced last week,
Last week, the Reserve Bank of India (RBI) had announced a TLTRO of Rs 50,000 crore to provide liquidity support to the shadow banking sector and the microfinance institutions.
Most small MFIs category don’t have investment-grade rating. According to RBI, the funds availed under TLTRO shall be deployed in investment-grade instruments.
Credit enhancement would entail guarantee from bigger institutions in case of defaults up to a certain percentage.
For incentivising financial institutions to lend under the facility, RBI on Tuesday also provided priority sector relief to banks investing in papers issued by small and medium-sized NBFCs and MFIs under the TLTRO 2.0. These investments would now not be part of a bank’s adjusted non-food bank credit while calculating the priority sector commitment.
Also, RBI also extended the deadline for banks to invest these funds by 15 working days from the auction. However, if banks fail to invest the funds in 45 days, they will have to pay a penal interest rate of 200bps a day, over and above the repo rate.
The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and midsized NBFCs and MFIs. Of the 50 per cent, 10 per cent has to be deployed in securities or instruments issued by MFIs, 15 per cent in securities/instruments of NBFCs with asset size of Rs 500 crore or below, and rest 25 per cent in NBFCs with asset size between Rs 500 crore and Rs 5,000 crore, the RBI said in its circular.
Thus, for MFIs, the earmarked amount is Rs 2500 crore, which are expected to flow to relatively bigger or mid-sized MFIs with asset under management up to Rs 500 crore. Smaller MFIs, which AUM less than Rs 100 crore are likely to be left out.
“Pooling is the only hope for us. SIDBI has also stipulated that liquidity support will be only for Triple B minus rated securities. More than 70 per cent of small MFIs will not be covered under this. We are trying to reach Sidbi if they can consider MFI grading, instead of rating to extend this credit facility to small MFIs,” said Gyan Mohan, director and CEO of Adi Chitragupta Finance, an MFI based in Patna, with a loan outstanding of Rs 80 crore.
Grading is an ordinal measure of the scalability, sustainability and reliability of the MFI's internal processes, controls and governance structure. However, it does not comment on the debt repayment capacity and is not a credit rating.