In light of recent events, the Central Government has granted a green signal to the inception of a Special Liquidity Scheme tailored for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs). The aim behind this is to better their liquidity situation. The announcement was made public in the Budget Speech of 2020-21, stating that a mechanism would be structured to offer extra liquidity facility to NBFCs/HFCs as an extension to the liquidity provided through the Partial Credit Guarantee Scheme (PCGS).
Understanding NBFCs and HFCs
HFCs distinguish themselves as specialized NBFCs. Recently, the Reserve Bank of India (RBI) introduced a new identification for HFCs. To qualify as HFCs, NBFCs must allocate 50% of its resources towards housing loans, 75% of these loans specifically allocated for individual home buyers. RBI oversees the regulation of HFCs.
The Scheme: An Overview
As per the approved scheme, a Special Purpose Vehicle (SPV) will be instituted to oversee a Stressed Asset Fund (SAF) for the NBFCs/HFCs. This SPV will launch securities validated by the Indian Government and bought exclusively by the RBI. The proceeds of the securities sale will be utilized by the SPV to attain short-term debt from NBFCs/HFCs. The Department of Financial Services (Ministry of Finance) is responsible for administering the scheme.
Eligibility Measures for NBFCs/ HFCs
To avail benefits from the scheme, NBFCs/HFCs should comply with certain regulations. They must not possess net Non-Performing Assets (NPAs) beyond 6% as on 31st March 2019. They are mandated to have net profits in at least one of the two previous financial years, 2017-18 or 2018-19. They should not be recorded under SMA-1 or SMA-2 category by any bank for their borrowings during the last year prior to 1st August 2018. SMA loans are classified based on their repayment delay, with SMA-0 indicating a delay between 1 and 30 days, SMA-1 pointing to a delay between 31 and 60 days, and SMA-2 featuring a delay between 61 to 90 days. After a delay of over 90 days, the asset is regarded as an NPA.
The Benefits of the Scheme
The scheme offers numerous benefits. Unlike the Partial Credit Guarantee Scheme, there is no mandate for NBFCs/HFCs to liquidate their current asset portfolio under this scheme. This scheme also elevates the chances for the NBFCs to acquire an investment grade for bonds issued. Additionally, the scheme could benefit the real economy by boosting the lending resources of NBFCs/HFCs/MFls, supplementing the liquidity measures already undertaken by the Government and RBI.
Implications on Finance
The direct financial burden for the Central government stands at approximately Rs. 5 crore, representing the possible equity contribution to the SPV. Beyond that, there is no financial obligation for the government unless the guarantee involved is invoked. On invocation, the government liability equals the amount of default subject to the ceiling guarantee, capped at Rs. 30,000 crore.
Defining Non-Banking Financial Company (NBFC)
An NBFC is a company registered under the Companies Act, 1956. Its primary functions include offering loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority, or other marketable securities of a similar nature, leasing, hire-purchase, insurance business, or chit business. However, it does not encompass institutions whose principal business involves agricultural activity, industrial activity, purchase or sale of any goods (other than securities) or services, or sale/purchase/construction of immovable property.
Key Features of NBFCs
While NBFCs cannot accept demand deposits, they also do not form part of the payment and settlement system, therefore, cannot issue cheques drawn up themselves. Additionally, the Deposit Insurance and Credit Guarantee Corporation’s deposit insurance facility is not available to depositors of NBFCs.