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Special Liquidity Scheme for NBFCs/HFCs

Recently, the Central government has approved the proposal to launch a Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to improve their liquidity position.
In the Budget Speech of 2020-21, it was announced that a mechanism would be devised to provide additional liquidity facility to NBFCs/HFCs over that provided through the Partial Credit Guarantee Scheme (PCGS).

HFCs are specialized NBFCs that have a separate regulator National Housing Bank (NHB).

Key Points
Details of the Scheme:
  • Under the scheme a Special Purpose Vehicle (SPV) would be set up to manage a Stressed Asset Fund (SAF) of the NBFCs/ HFCs.
  • The SPV will issue securities, which 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 (Ministry of Finance).

Eligibility for NBFCs/ HFCs:
  • They should not have net Non Performing Assets (NPAs) of more than 6% as on 31st March 2019.
  • They should have made net profit in at least one of the last two preceding financial years of 2017-18 and 2018-19.
  • They should not have been reported under SMA-1 or SMA-2 category by any bank for their borrowings during the last one year prior to 1st August 2018.
  • Banks classify borrowers into Special Mention Accounts (SMA) based on their delay in repayment.
  • SMA-0 loans are overdue between 1 and 30 days.
  • SMA-1 loans are overdue between 31 and 60 days.
  • SMA-2 loans are overdue between 61 to 90 days.
  • The asset turns NPA after 90 days of being overdue.

Benefits:
  • Unlike the Partial Credit Guarantee Scheme, NBFCs/ HFCs do not have to liquidate their current asset portfolio under this scheme.
  • Current assets are all the assets of a company that are expected to be used as a result of standard business operations over the next year.
  • The scheme would also act as an enabler for the NBFC to get investment grade for bonds issued.
  • The Scheme would benefit the real economy by augmenting the lending resources of NBFCs/HFCs/MFls.
  • This facility would supplement the liquidity measures taken so far by the Government and RBI.

Financial implication:
  • The direct financial implication for the Central government is Rs. 5 crore, which may be the equity contribution to the SPV.
  • 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, which has been set at Rs. 30,000 crore.
Published date : 03 Jul 2020 03:15PM