Union Cabinet approves special liquidity scheme for NBFCs, HFCs
The Union Cabinet on Wednesday approved the proposal of the Ministry of Finance to launch a new Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to improve the liquidity position of the NBFCs, HFCs.
The proposal was part of Rs 20 lakh crore package announced by Finance Minister Nirmala Sitharaman last week following an announcement by Prime Minister Narendra Modi.
The direct financial implication for the government is Rs 5 crore, which may be the equity contribution to the Special Purpose Vehicle (SPV), the government said in a press release on Wednesday.
Beyond that, there is no financial implication for the government until the Guarantee involved is invoked, it said.
However, on invocation, the extent of government liability would be equal to the amount of default subject to the guarantee ceiling. The ceiling of aggregate guarantee has been set at Rs 30,000 crore, to be extended by the amount required as per the need.
The Central Government has proposed a framework for addressing the liquidity constraints of Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) through a special liquidity scheme. An SPV would be set up to manage a Stressed Asset Fund (SAF) whose special securities would be guaranteed by the Government of India and purchased by the Reserve Bank of India (RBI) only.
The proceeds of sale of such securities would be used by the SPV to acquire short-term debt of NBFCs/HFCs. The Scheme will be administered by the Department of Financial Services, which will issue the detailed guidelines, the press release said.
As part of the implementation schedule, a large public sector bank would set up an SPV to manage a stressed asset fund which would issue interest bearing special securities guaranteed by the Government of India, to be purchased by RBI only.
The SPV would issue securities as per requirement subject to the total amount of securities outstanding not exceeding Rs 30,000 crore to be extended by the amount required as per the need. The securities issued by the SPV would be purchased by RBI and proceeds thereof would be used by the SPV to acquire the debt of at least investment grade of short duration (residual maturity of upto 3 months) of eligible NBFCs and HFCs, the government said.
The Partial Credit Guarantee Scheme involves multiple bilateral deals between various public sector banks & NBFCs and requires NBFCs to liquidate their current asset portfolio and involves flow of funds from public sector banks. However, the proposed scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio. The scheme would also act as an enabler for the NBFC to get investment grade or better rating for bonds issued.
The scheme is likely to be easier to operate and also augment the flow of funds from the non-bank sector, the government said.
The scheme would benefit the real economy by augmenting the lending resources of NBFCs, HFCs and MFls as the facility would supplement the liquidity measures taken so far by the government and RBI, it added.
Earlier in her Budget speech of 2020-21, Sitharaman had announced that a mechanism would be devised to provide additional liquidity facility to NBFCs and HFCs over that provided through the Partial Credit Guarantee Scheme (PCGS).
There is an urgency to implement the above Budget announcement to strengthen financial stability on account of the emerging situation of COVID-19, the government said.