Editors' Take

NBFCs and MFIs in India during Covid-19

B-updated mfi nbfc covid-19 india
B-updated mfi nbfc covid-19 india

People often confuse the role of MFIs(Microfinance Institutions) and NBFCs(Non-Banking Financial Institutions). However, it turns out both aid with financial services, are different. NBFCs perform functions similar to banks in the absence of banks in rural areas. MFI stands for micro finance institutions and operate at a further smaller level than NBFCs. MFIs provide very small loans to the underprivileged sections of the society.

The RBI said on March 27 that it would lend as much as ₹1 lakh crore to banks under the TLTRO mechanism to ease funding pressure for corporates that was to be invested in primary and secondary market bonds and commercial papers in equal measure. It also reduced the repo rate to 4.4 per cent, the lowest in 15 years. The pandemic hit these institutions with the measures taken by the RBI on 27th March.

Both Sa-dhan, India’s largest microfinance industry body with 212 members, and Microfinance Institutions Network (MFIN), the industry grouping for NBFC-MFIs, separately urged the prime minister to take action.

MFIN said in its letter dated April 13 to the PM “We request you to direct the RBI to instruct all banks and other lenders to kindly pass on the same moratorium (benefit) to us, as all of us are giving to others. This simple step will go a long way to support the aspirations and livelihoods of millions of enterprising women across our nation,”.

On 17th April, along with reduction in the reverse repo rate to 3.75 percent, RBI also provided the much-needed liquidity support to non-banking financial companies (NBFCs) and microfinance institutions (MFIs) by announcing a second trail of targeted long-term repo operation window (TLTRO 2.0) of at least ₹50,000 crore. The Reserve Bank said it will conduct the first auction under the Targeted Long-Term Repo Operations 2.0 (TLTRO) for an amount of Rs 25,000 crore on April 23.

Under the TLTRO 2.0 window, banks can access three-year funding from the RBI to invest in investment-grade papers of NBFCs, with at least 50% invested in small- and mid-sized NBFCs and MFIs.

Within this, 10% will be invested in securities issued by MFIs, 15% in securities issued by NBFCs with asset size of ₹500 crore and below, and another 25% in securities issued by NBFCs with asset size of ₹500-5,000 crore.

The central bank will make available further liquidity under this facility, depending on the pattern of utilization and requirement, assured RBI governor Shaktikanta Das. The measure has aimed at maintaining liquidity in the system, facilitating and incentivising banks to ensure better credit flow and enabling normal functioning of the financial markets.

The funds availed under TLTRO 2.0 shall be deployed in investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs),” the RBI said in a notification.

Out of the 50 per cent funds availed, 10 per cent should go for securities issued by micro-finance institutions (MFIs) while 15 per cent towards instrument issued by NBFCs with asset size of Rs 500 crore and below. Remaining 25 per cent to be earmarked for instruments issued by NBFCs with assets size between Rs 500-5,000 crore, it added.

Tags : businesseconomyEnglishenterprisegrowthincomeIndian economyMFImoneyNBFCPandemicsmall enterprisesmall scale industrieswealth
Prakriti Batra

The author Prakriti Batra


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