Govt clears Rs 30,000 Cr special liquidity scheme for stressed NBFCs, HFCs

The Union Cabinet on Wednesday gave nod to launch a special liquidity scheme worth Rs 30,000 crore for stressed non-banking financial companies (NBFCs) and housing finance companies (HFCs), whose financials further deteriorated due to the COVID-19 crisis.

This is a post-facto approval from the Cabinet as the scheme was announced as part of the first tranche of the Rs 21 lakh crore comprehensive economic package.

Seed Funding

It was announced in the Budget 2020-21 that a mechanism would be devised to provide additional liquidity facility to NBFCs/HFCs over what is provided through the Partial Credit Guarantee Scheme (PCGS), an official statement said.

“This facility would supplement the liquidity measures taken so far by the government and RBI. The scheme would benefit the real economy by augmenting the lending resources of NBFCs/HFCs/MFls,” it added.

NBFC and HFC sectors came under stress following a series of defaults by group companies of IL&FS in September 2018.

The statement further said an SPV would be set up to manage a Stressed Asset Fund (SAF) whose special securities would be guaranteed by the government and purchased by the Reserve Bank of India (RBI) only.

The proceeds of the sale of such securities would be used by the SPV to acquire short-term debt of NBFCs/HFCs, it said, adding, the scheme will be administered by the Department of Financial Services, which will issue the detailed guidelines.

The direct financial implication for the government is Rs 5 crore, which may be the equity contribution to the Special Purpose Vehicle (SPV), it said.

Beyond that, there is no financial implication for the government until the guarantee involved is invoked.

“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,” it added.

Sharing further details, it said, 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 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 up to three months) of eligible non-banking financial companies (NBFCs) or housing finance companies (HFCs), it said.

Unlike PCGS, which involves multiple bilateral deals between various public sector banks and NBFCs, requires shadow banks to liquidate their current asset portfolio and involves flow of funds from public sector banks, the proposed scheme would be a one-stop arrangement between the SPV and NBFCs without having to liquidate their current asset portfolio.

The scheme would also act as an enabler for the NBFC sector to get investment grade or better rating for bonds issued, it said, adding, the scheme is likely to be easier to operate and also augment the flow of funds from the non-banking sector.

In another initiative, the Cabinet also relaxed the norms of the Partial Credit Guarantee Scheme and extended its time period in order to widen the coverage to include a larger number of NBFCs, HFCs, and microfinance institutions.

As part of the Rs 21 lakh crore special economic package amid the COVID-19 crisis, Finance Minister Nirmala Sitharaman last week announced Partial Credit Guarantee Scheme (PCGS) 2.0 worth Rs 45,000 crore for non-banking financial companies (NBFCs) and microfinance institutions (MFIs).

Under the modified PCGS, sovereign guarantee of up to 20 percent of first loss will be provided to state-owned banks for purchase of bonds or commercial papers of NBFCs, MFIs, and housing finance companies (HFCs), having a credit rating of AA or below, including unrated paper with an original maturity of up to one year.

The Cabinet has also extended the time period of the scheme from June 30, 2020, to March 31, 2021, for purchase of pooled assets of the distressed entities.

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