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RBI’s liquidity-boosting measures for NBFCs unlikely to boost credit flow to broader economy: Moody's

20 Apr 2020 Evaluate

Moody's Investors Service in its latest report has said that the Reserve Bank of India's (RBI) a slew of liquidity-boosting measures for the non-banking financial company (NBFC) sector are unlikely to boost the credit flow to the broader economy as NBFCs would shore up their own liquidity rather than on-lending to customers. It said the measures will soften the near-term credit negative impact on NBFCs’ funding and liquidity.

The RBI will conduct targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of Rs 50,000 crore, 'to begin with', in tranches of appropriate sizes. 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 percent of the total amount availed going to small and mid-sized NBFCs and microfinance institutions (MFIs).

According to the report, the targeted long-term repo operation will help facilitate funds to NBFCs with well-established franchises, for example those with long-operating histories, or to those backed by strong corporate groups. Nevertheless, it expects funding conditions for other NBFCs to remain under pressure given the risks to their asset quality. 

The report further stated that under the TLTRO 2.0 window, banks availing funds will have to invest 10 per cent in securities issued by MFIs, 15 percent in securities issued by NBFCs with asset size of Rs 500 crore and below, and 25 percent in securities issued by NBFCs with asset size of Rs 500-5,000 crore. It added that the RBI announced the liquidity facility under the TLTRO 2.0 window for NBFCs and MFIs after these institutions failed to get funding under the earlier TLTRO scheme announced late in March. 

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