The government should provide banks with a partial credit guarantee to protect against risk furs from lending to non-bank financial and microfinance companies, as liquidity is needed at a time when the economy is being hit by the global corona virus outbreak, the industry said body CII Sunday. Given the current economic crisis and the urgent need for liquidity in non-bank financial companies (NBFCs) and microfinance institutions (MFIs), the Confederation of Indian Industry (CII) has urged the government to provide partial backstop guarantees.
This will ensure that banks overcome their risk aversion and fully restructure the Reserve Bank of India’s (RBI) timely intervention announced on Friday, it said in a Sunday release. The industry lobby praised the second round of liquidity support for the financial sector, calling it “timely” and “far-reaching”. It aims to ensure credit flows to the NBFCs which in turn lend to SMEs and the agricultural community.
To address the current crisis created by the COVID-19 outbreak and the resulting nationwide lockdown, the government and the RBI have announced many measures to alleviate corporate stress. In order to give the banking system the necessary confidence to participate in the auction and to lend to such entities, the CII recommended that the government provide a backstop facility in the form of a partial credit guarantee scheme, where the amount of the overall guarantee is limited up to a loss of up to 20-30 percent of the amount lent by the banks under the scheme.
There will be no immediate impact on the budget deficit as it is a contingent liability. “This move will provide the banks with the confidence and security they need to encourage them to participate in the auction and pay out much needed cash flows to the investment-grade options of MFIs and NBFCs,” said CII Director General Chandrajit Banerjee. He said the measures announced by the RBI, particularly targeted long-term repairs operation 2.0 (TLTRO 2.0), which require the central bank to allocate 50 percent to medium and small NBFCs and MFIs, have been a great relief to them. These entities are expected to gain access to much-needed liquidity, Banerjee said.
The industry association said that in the current scenario, the health of industry and the financial sector has taken a dip and banks are becoming increasingly risk averse. Due to the moderate risk appetite of banks, it is expected that the auctions under TLTRO 2.0 will receive a moderate response from the banks, the CII said.
Given the results of previous auctions, it is likely that the RBI’s intention to bring liquidity to the system through small and medium NBFCs and MFIs may not materialize. “In this emergency, the NBFC and MFI sectors have the ability to ensure a smooth and continuous flow of credit, in particular to MSMEs (micro, small and medium-sized enterprises), agriculture and retail, and to ensure that they can earn a livelihood, provide employment to a lower income group, make timely payment of wages and salaries and avoid financial difficulties, ”it added.
The coronavirus pandemic has created an uncertainty that is difficult to measure. The impact of COVID-19 was far worse than the financial crisis facing the world, including India, in 2008. Along with the economic consequences, the current situation can be touted as the worst human catastrophe after the two world wars, the CII said.