Cabinet approves Special liquidity scheme for NBFCs/HFCs to address their liquidity stress

New Delhi: The Union Cabinet, chaired by Prime Minister Narendra Modi, on Wednesday (May 20) permitted the Finance Ministry’s proposal to launch a brand new Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to enhance the liquidity place of the NBFCs/HFCs, mentioned a authorities notification. 

Under this scheme, the federal government has proposed a framework for addressing the liquidity constraints of Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) by way of 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 and purchased by the Reserve Bank of India (RBI) only,” in accordance to the assertion. 

“The proceeds of the sale of such securities would be used by the SPV to acquire short-term debt of NBFCs/HFCs,” it mentioned including that the scheme might be administered by the Department of Financial Services, which can problem the detailed pointers.

Accordingly, a big public sector financial institution would arrange an SPV to handle a careworn asset fund which might problem curiosity bearing particular securities assured by the federal government to be bought by RBI solely. 

“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 upto 3 months) of eligible NBFCs/HFCs,” the assertion mentioned.

Notably, the proposed scheme can be a one-stop association between the SPV and the NBFCs with out having to liquidate their present asset portfolio. “The scheme would also act as an enabler for the NBFC to get investment grade or better rating for bonds issued. The scheme is likely to be easier to operate and also augment the flow of funds from the non-bank sector,” in accordance to the assertion.

In the Budget Speech of 2020-21, it was introduced {that a} mechanism can be devised to present further liquidity facility to NBFCs/HFCs over that offered by way of the PCGS. This facility would complement the liquidity measures taken up to now by the federal government and RBI. The Scheme would profit the true economic system by augmenting the lending sources of NBFCs/HFCs/MFls.

This Budget announcement is being permitted to strengthen monetary stability on account of the rising scenario of COVID-19 disaster.

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