May 25, 2020
Under the scheme, a Special Purpose Vehicle (SPV) would be set up to manage a Stressed Asset Fund (SAF).
The securities of the Stressed Asset Fund will be guaranteed by the Government and purchased by the RBI only.
The Government investment for the scheme is Rs.50 million, which may constitute contribution to the SPV.
This Scheme is being implemented with urgency amid the economic challenges brought up by COVID-19.
The Union Cabinet, chaired by Prime Minister Shri Narendra Modi, has given its approval to launch a new Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to improve their liquidity positions. The Indian financial sector has been going through a phase of steady reforms aimed at improving operational efficiency and upgrading to international standards of performance. The Scheme is another move aimed at boosting confidence in the Indian financial sector.
Under the Scheme, a Special Purpose Vehicle (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.
The Scheme is expected to cost the Government Rs.50 million, which may constitute 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 would be equal to the amount of default subject to the Guarantee ceiling. The ceiling of aggregate guarantee has been set at Rs.300 billion, to be extended by the amount required as per the need.
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 and purchased by the RBI. The SPV would issue securities as per requirement subject to the total amount of securities outstanding not exceeding Rs.300 billion. The proceeds from the sale of securities would be used by the SPV to acquire the debt of at least an investment grade (residual maturity of up to 3 months) of eligible NBFCs/HFCs.
Unlike the Partial Credit Guarantee Scheme (PCGS), which involves multiple bilateral deals between various public sector banks and NBFCs and requires NBFCs to liquidate their current asset portfolio and involves the flow of funds from public sector banks, the new 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 NBFCs to get investment grade or better ratings 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 Union Budget 2020-21 had announced a mechanism to provide additional liquidity facility to NBFCs/HFCs over that provided through the PCGS. 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. This provision is now being implemented with urgency amid the economic challenges of COVID-19. This will improve access to funds amid the COVID-19 difficulties.