The government may consider creating a special window leveraging SUUTI’s strategic holdings to provide liquidity to cash-strapped non-banking financial companies (NBFCs) and Housing Finance Companies (HFCs).
A senior government official told BusinessLine that this suggestion came up for discussion during a meeting called by the Prime Minister’s Office (PMO) to discuss the liquidity crisis.
“The RBI should create a window the way it did in 2008-09. If it does not, for one or other reasons, the government can create a special window to make cash available to NBFCs and HFCs,” the official said. This could be done by creating an SPV (Special Purpose Vehicle), he added.
“SUUTI’s holding can be transferred to this SPV. This can be leveraged to raise funds and provide them to NBFCs and HFCs,” he explained. SUUTI is the Specified Undertaking of the Unit Trust of India. It was formed following the restructuring of the erstwhile Unit Trust of India (UTI) into the UTI Trustee Company Private Limited and SUUTI. It came into effect on February 1, 2003.
SUUTI has strategic holdings in ITC, L&T and Axis Bank, and in some unlisted firms, and small holdings in many listed companies.The current value of its holdings in these three companies alone is over ₹45,000 crore.
The official explained that leveraging SUUTI holding will benefit not just NBFCs and HFCs but also the government. “The cash will help NBFCs and HFCs to retire their debt. This will strengthen their valuation and the value of their stock. This will give better earnings to SPVs,” he added.
Cash support to NBFCs and HFCs is critical for the consumer durables and real estate sectors, where most purchases are financed.
The official feared that the persistence of the current conditions, with inadequate credit options, may affect festival purchases. “That is not good news for corporate earnings as well as government revenue during the second half of the current fiscal”. In November alone, about ₹1-lakh crore of NBFCs’ and HFCs’ debt will mature. “Without cash, these institutions will be forced to monetise their assets, and their balance-sheet will shrink,” he said.
These companies raise deposits and get loan from banks to repay their liabilities. Although the RBI has relaxed some banks’ norms for providing more cash, they are considered insufficient.
The RBI maintains that there is enough liquidity in the system. However, another official noted that while it was true that the RBI had freed up liquidity within banks, this was not flowing to NBFCs and HFCs owing to the ridigity of various norms.
The focus now is evidently on averting a “big default”, but even a “small default can cause big problems,” the official said. “If it happens, all other papers will be downgraded.”