Here’s how non-bank lenders plan to raise money

Social distancing is the prescribed norm to beat the viral chain, but in the complex world of financing, it pays to stick together. That’s what many small non-bank lenders plan to do: Come together and sell bonds that make the cut for bank financing.

As things stand now, the majority of the NBFCs can’t sell bonds that make the grade to draw in the banks, which are using funds raised through the targeted long-term repo operation (TLTRO) mechanism to finance corporate and other lenders. The pooled issues will help many NBFCs including microfinance firms, especially those below investment grade to access the TLTRO liquidity tap since their credit rating will likely head north, lowering borrowing costs.

RBI has planned a Rs 50,000-crore liquidity infusion through TLTRO 2.0 with a direction to banks to invest at least half of it into “investment-grade” commercial papers or bonds issued by smaller non-bank lenders, including microfinance firms.

About a fourth of the rated non-bank lenders are below investment grade and can’t access the liquidity window individually. ICRA said that out of 250 rated non-bank lenders, about 40 are below investment grade, while data from Microfinance Institutions Network (MFIN) showed that 25% of their members fall in the junk category.

MFIN has already got in touch with fund arrangers such as Northern Arc Capital and Vivriti Capital for pooled bond issues, two people familiar with the development said.

“We are in discussions and working on a structure,” said Northern Arc chief executive Kshama Fernandes. “We will include all firms – small and mid-sized, including unrated and non-investment grade. This is what we had done during the liquidity crisis in 2018.”

The pooled bond structure typically helps smaller enterprises that face difficulty in raising funds from diverse investors at competitive prices. “We are in the process of getting feedback from investors. It may require some policy amendments at their end to enable taking exposure to unrated or non-investment grade entities even through a structure,” Fernandes said.

Separately, industry veterans said that many that would not float bonds will still have access to funding from development finance institutions, banks and other large NBFCs

About 6,500 NBFCs, less than Rs 500 crore in asset size, have already reached out to banks seeking credit lines. Others would seek funds from bigger NBFCs.

“More than three-fourth of total NBFCs will obtain a new lifeline,” said Raman Agarwal, chairman FIDC. “While some of them may not qualify under investment grade, they can still avail refinancing facility from SIDBI or NABARD.”

Kamal Auto Finance, a Jaipur-based NBFC rated BBB-, is negotiating with half a dozen banks.

“While some small NBFCs would access TLTRO money from banks, others will get it from large NBFCs, flush with cash now,” said Shreyans Kasliwal, director at Kamal Auto Finance.

Chennai-based Mahaveer Finance is looking to raise Rs 50 crore that will largely be used to fund vehicle purchases.

“With partial easing of lockdown, we see a big opportunity for supporting our customers’ working capital requirements,” said Praveen Dugar, executive director at Mahaveer Finance, based out of Chennai.

It is crucial for bigger NBFCs to access funds so that the chain is kept intact.

“The number of investment grade companies with less than Rs 500 crore asset book would be low,” Rajat Bahl – Chief Ratings Officer at Brickwork Ratings. “If cash starts flowing in select top-rated NBFCs the sector will breathe easy.”

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