Special Liquidity Scheme for NBFCs/HFCs

• 02 Jul 2020

Why in News

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. Recently, the Reserve Bank of India (RBI) came up with the new definition of HFCs.
  • To qualify as HFCs, a NBFC must have 50% assets as housing loans and 75% of which should be for individual homebuyers.
  • HFCs are regulated by RBI.

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 31^st 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.

Non-Banking Financial Company

• NBFC is a company registered under the Companies Act, 1956.
• It is engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.
• But, it does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
• A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
• Features of NBFCs
  
  • NBFC cannot accept demand deposits.
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.

Source: PIB