RBI needs to keep power ready to buy corporate bonds, says former RBI deputy governor HR Khan

The 3-month moratorium for term loans given by the Reserve Bank of India (RBI) has created an asset-liability mismatch (ALM) at the non-banking financial companies (NBFCs)-end. Their customers now have the option to defer the equated monthly installments (EMIs) by 3 months but the same forbearance is not available for the NBFC's to service their bonds, debentures and public deposits.

HR Khan, former deputy governor of RBI, Umesh Revankar, MD of Shriram Transport Finance, Sandeep Parekh, founder of Finsec Law Advisors, TT Srinivasaraghavan, managing director of Sundaram Finance and Lakshmi Iyer, CIO, debt and head product, Kotak Mahindra AMC shared their views and outlook on this development.

“Bond has been a reasonably large portion of our liability over the period. Definitely, we need some kind of forbearance in the bond. Public deposit is a very small portion, that we can service, we don’t have much challenge on that. However, capital market through Securities and Exchange Board of India (SEBI), forbearance in the bond market should definitely help us because that is going to be a large chunk in most of the NBFCs,” said Revankar.

“Apart from the bonds, there is also the securitized paper and the direct assignments where we as NBFCs don’t have the right because we no longer are the owners of these assets. So the trustees or the guys who have bought the paper have to authorize us to extend this moratorium, if we ask for it. So Umesh Revankar is right, bank borrowing – at best – is between 30 percent and 40 percent for many NBFCs and the balance does come from bonds and from securitization, " said Srinivasraghavan.

"So, we clearly do need an answer to this. Of course, we have sent this representation to the RBI as well as to the ministry and we are awaiting a response. We said just like you have done for bank loans, give us the same forbearance on payment of interest of bonds and similarly, for securitized paper,” Srinivasaraghavan added.

Giving his take on this, Parekh said, “The issue is pretty extraordinary because under the contract, I don’t think there are any periods during which you can stop payments without being called a defaulter. People are not able to collect money and therefore they are unable to pay money or they could have logistical issues as well in terms of people going to the office and making the payments etc."

"These are times, which require extraordinary measures so that we don’t set off a chain reaction of defaults and starting from the credit markets to the debt markets, which the NBFCs use. There has to be a significant effort to ensure that these short-term non-defaults are not considered as defaults. SEBI and RBI probably have to work closely together and we are seeing both of them working very hard in terms of giving various types of forbearances,” added Parekh.

When asked if interest payment’s postponement on debentures and bonds will disrupt mutual funds or some investors, Iyer replied, “It is a difficult and a tricky situation right now, which is why probably capital market instruments have been exempted from this forbearance at this point in time."

"While mutual funds don’t follow ALM, we have bucketing of maturities and interest payments, which are part of the cashflow cycle. So, it is important that one takes in consideration all of these. The LTRO seems to be one potent solution for most such NBFCs or other entities where they can avail a line of finance or refinance in case if they have to service the capital market entities because it will pose huge hurdles from managing our own liabilities, which are with investors,” said Iyer.

“This is very unprecedented and exceptional situation. One thing, which we have learnt in the global crisis of 2008-2009, is ‘never say never to anything’. My suggestion would be that let us not go to that drastic step where there are so many other consequences like people not getting interest for an investment. The whole idea is to provide line of credit to NBFCs has tide over this problem. The issue is that this LTRO first tranche has gone and how much of that is getting distributed to these NBFCs has to be seen and the second tranches should happen quickly,” said Khan.

“Some of the NBFCs post RBI’s ALM circular have got cash. That cash also they can use. It is not that they are not having cash, some of them are holding cash and the third is the Brahmastra of RBI buying corporate paper. That was one of the recommendations, which we had made in the inter-regulatory group. Time has come to look at it very closely if banks are not willing to take credit risks, maybe high quality paper RBI should look at,” added Khan.