State to take up NBFCs’ demand with Centre

Lukewarm response from banks to invest in bonds

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The State government will seek the Central government’s intervention to persuade commercial banks to invest in the bonds of Non-Banking Financial Companies (NBFCs) such as the State Financial Corporations (KFC) for offering a life line to the mirco, small and medium enterprises (MSME) deeply impacted by the COVID-19 crisis.

The government move comes in the wake of the alleged lukewarm response from banks to invest in the bonds of the KFC for raising ₹750 crore to provide loans to the MSMEs which has a significant presence in the State.

The Reserve Bank of India (RBI) had on April 17 decided to conduct Targeted Long-Term Repo Operations 2.0, for three years for ₹50,000 crore.

Of the total amount borrowed under this special window, banks have to invest 10% in securities of micro finance institutions, 15% in bonds of NBFCs with an asset size up to ₹500 crore and 25% in the bonds floated by NBFCs with an asset size ranging between ₹500 crore and ₹5,000 crore. The KFC, with an asset size of ₹3,500 crore, falls in the second category of NBFCs.

As per the system, banks have to participate in the auction and secure funds. The first auction was conducted on April 23 for ₹25,000 crore at an interest rate of 4.4%. The response was far from encouraging and there were only 14 bids for ₹12,850 crore against the notified amount of ₹25,000 crore.

Finance Minister T.M. Thomas Isaac told The Hindu that this cold shouldering by the commercial banks could be construed as their reluctance to lend to small and medium sized NBFCs and micro finance institutions. Banks have not even availed themselves of even one-fourth of the amount set for auction. Moreover, they have set interest rates ranging between 9% and 10% for taking loans.

Such interest rates are unviable for the KFC and similar NBFCs that offer financial support to small and medium traders and entrepreneurs at an affordable rate. This approach would only stymie the proposed aim of the stimulus package to address the liquidity crisis by enhancing the purchasing capacity of the people through banks.