Modi govt helps NBFCs, HFCs to get rid of existing debts; approves special liquidity scheme

There are some other restrictions too, barring which, NBFCs and HFCs will be eligible for short-term borrowing scheme under the Special Purpose Vehicle.

In an effort to provide financial support to the non-banking finance companies and housing finance companies, the Modi government approved a special liquidity scheme through a Special Purpose Vehicle (SPV). The Reserve Bank of India said that SBICAP – a subsidiary of the State Bank of India – has set up an SPV to manage this operation and aims to cut the ongoing risks to the financial sector. The SPV will purchase the short-term papers from eligible NBFCs or HFCs, who can utilise the funds under this scheme solely for the purpose of getting rid of existing liabilities.

The RBI added that commercial papers (CPs) and non-convertible debentures (NCDs) will be used as the instruments with a residual maturity of not more than three months and rated as investment grade. The facility under this scheme will be allowed until September 30, 2020, and thereafter, no fresh purchases from NBFCs and HFCs will be made. The statement also mentioned that all the dues will be recovered by December 31, 2020, or at the modified period under the scheme.

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Certain conditions have also been put in place for the NBFCs and HFCs to become eligible for the new scheme. The RBI underlined that NBFCs including microfinance institutions that are registered under the Reserve Bank of India Act, 1934, excluding those registered as core investment companies; HFCs that are registered under the National Housing Bank Act, 1987; firms with net NPAs less than 6 per cent, as on March 31, 2019; and the firms which have made a net profit in at least one of the last two preceding financial years; will be eligible for the new scheme.

There are some other restrictions too, barring which, NBFCs and HFCs will be eligible for short-term borrowing scheme under the Special Purpose Vehicle. Meanwhile, the government and the RBI have announced a series of measures to alleviate liquidity stress at the NBFCs but the measures have been mostly ineffective, Moody’s said in a note last month.

(This story was originally published on www.financialexpress.com on July 1, 2020, Wednesday)