The Small Industries Development Bank of India (Sidbi) has designed schemes to provide liquidity support to the MSME sector by extending 90-day term loans to non-banking financial cmpanies (NBFCs) and microfinance lenders. The move follows the Reserve Bank of India (RBI)'s provision of a special refinance facility of Rs 50,000 crore to all India financial institutions, such as National Bank for Agriculture and Rural Development (Nabard), Sidbi, and National Housing Bank (NHB).

Of the Rs 50,000 crore provided by RBI, Sidbi has been allotted Rs 15,000 crore. Through its special schemes launched to support the MSME sector, Sidbi will provide term loans to shadow banks, microfinance institutions (MFIs) and small finance banks for on-lending to MSME sector.

NBFCs and MFIs have been hit on two fronts, as their collections have dipped due the covid-19 crisis and subsequent lockdown, and also because they have extended a moratorium of three months to their borrowers so as to provide them with some relief during the on-going crisis. But, banks have still not reached a consensus on extending the moratorium facility to the NBFCs and MFIs.

While there is little to no collections coming in, the shadow lenders will have to meet their debt obligations. To provide some relief, the RBI last week came out with targeted long-term repos (TLTRO 2.0) of Rs 50,000 crore and refinancing facilities of Rs 50,000 crore for all India financial institutions.

NBFCs who want to avail credit from Sidbi to ensure operational continuity and for on-lending to MSME sector have to have an external rating of BBB- or superior as of March 31, a minimum net owned funds of Rs 20 crore, minimum asset size of Rs 50 crore. Its promoter should not be in the RBI’s blacklist or defaulter’s list and the capital adequacy ratio has to be above the regulator’s requirements in the last 24 months.

Similarly, MFIs with BBB- rating or superior to that and a minimum MFI grading of Mfr5 can avail loans from Sidbi under the special scheme.

Rating agency Icra has estimated that micro finance companies are running a risk of having cash shortfall of Rs 2,600 crore in the first quarter ending June 2020 (Q1FY21). While their repayments and operational expense obligations are pegged at Rs 8,000 crore in the first quarter, the liquidity buffers on balance sheet are around Rs 5,400 crore.

Similarly, Crisil said the MFI’s may face a double-whammy as the extension in lockdown period will severely affect their asset quality and will also put pressure on their liquidity profile.

Experts have said that the twin funding measures announced by the RBI will definitely provide some relief to NBFCs/HFCs/ MFIs but at the same time the fact that no formal announcement was made on applicability of bank loan moratorium would be a dampener for them.

Brokerages have pointed out that that the support to the shadow banking sector is not enough as their liquidity needs of the lenders is much higher than what has been provided.

“With banks continuing to abstain from providing the necessary liquidity to NBFCs (especially mid/small NBFCs), the RBI would require to infuse further liquidity at regular intervals in order to avoid any systemic issues (similar to post ILFS crisis) for NBFCs as well as for the entire financial system”, a report by Emkay Global Research said.