Cabinet approves Special Liquidity Scheme for NBFCs/HFCs to address their Liquidity Stress

The Union Cabinet chaired by Prime Minister  Narendra Modi has okayed the Ministry of Finance’s proposal to launch a new Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to improve their liquidity position. It has been announced in the Budget Speech for  2020-21 that a mechanism would be devised to provide additional liquidity facility to NBFCs/HFCs over that provided through the Partial Credit Guarantee  Schemes. This facility would supplement the liquidity measures taken by the Government and RBI. The Scheme will benefit the real economy by augmenting the lending resources of NBFCs/HFCs/MFls, says an official statement. The 36 direct financial implication for the Government is Rs. 5 crores, which may be the equity contribution to the Special Purpose Vehicle (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 will be equal to the amount of default subject to the Guarantee ceiling. The ceiling of aggregate guarantee has been set at Rs. 30,000 crores, to be extended by the amount required as per the need. The 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 the 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. Large public sector banks 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 up to 3 months) of eligible NBFCs / HFCs.