Special Liquidity Scheme for NBFCs and HFCs through SPV

Ashish M. Shaji

24 Sep, 2020

The union ministry announced the launch of a Special Liquidity Scheme recently to improve the liquidity position of Non-Banking Financial Companies (NBFCs) and HFCs. The Reserve Bank of India will provide funds for this scheme by subscribing to the government guaranteed special securities issued by the trust.

What are NBFCs and HFCs?

A Non-Banking Financial Company (NBFC) is a company engaged in the business of loans and advances, acquisition of shares/bonds/stocks/debentures/securities issued by the government or the local authority or other marketable securities.

The Housing Finance Companies (HFCs) are entities set up under a license by the National Housing Board (NHB) to provide home loans according to the guidelines of NHB.

What is the Special Liquidity Scheme?

The scheme provides for a Special Purpose Vehicle to manage Stressed Asset Fund, whose special securities are guaranteed by the Government of India (GOI) and purchased by RBI. The proceeds from the sale of securities can then be used by the Special Purpose Vehicle to acquire NBFCs/HFCs’ short term debt with residual maturity of three months. The Special Liquidity Scheme shall be administered by the Department of Financial Services under the Ministry of Finance.

Who is eligible to borrow under the Special Liquidity Scheme?

The Reserve Bank of India has laid down the following eligibility for NBFCs and HFCs:

• All investment grade RBI registered NBFCs, excluding CICs (Core Investment Companies), and NHB Act 1987 registered HFCs are eligible under this scheme;
• The capital adequacy of NBFCs/HFCs must not be below the regulatory minimum (15% and 12% respectively) as on March 31, 2019;
• The Net Non-Performing Assets must not be more than 6% as on March 31, 2019;
• They should have made profits in at least one of the last two financial years (2017-18 and 2018-19);
• They must not have been reported under SMA(Special Mention Accounts)-1 or SMA-2 by any bank for their borrowings in last one year before August 1, 2018; and
• They are required to comply with the requirement of the Special Purpose Vehicle for an appropriate level of collateral from the entity, which, however, shall be optional and to be decided by the SPV.

What does the notification state further?

According to the decision of the government, SBICAP, which is a subsidiary of the State Bank of India, has set up a Special Purpose Vehicle to manage this operation. The Special Purpose Vehicle will purchase the short term papers from eligible NBFCs/HFCs, who will then use the proceeds under the scheme solely for the purpose of extinguishing existing liabilities.

The instruments shall be Commercial Papers (CPs) and Non-Convertible Debentures (NCDs) with a residual maturity of not more than 3 months and rated as investment grade. It further states that the facility shall not be available for any paper issued after 30^th September 2020, and the Special Purpose Vehicle would cease to make fresh purchases after 30^th September 2020 and will recover all dues by 31^st December 2020 or as may be modified subsequently under the scheme. 

What are the benefits under the Special Liquidity Scheme?

This scheme has the following benefits:

• The NBFCs/HFCs do not require to liquidate their current asset portfolio unlike the Partial Credit Guarantee Scheme;
• The Special Liquidity Scheme may act as an enabler for the NBFC to get investment grade for bonds issued;
• This scheme shall benefit the economy by augmenting the lending resources of NBFCs, HFCs, and MFIs;
• This facility shall supplement the liquidity measures taken by the government and the RBI until now.

Investment by the Special Purpose Vehicle

The SPV set up under the scheme has an investment committee. Such an investment committee shall decide the amount to be invested in a particular NBFC/HFC. The FAQs provided in the SBICAP mentions that the trust shall invest not more than 2000 crore rupees on anyone NBFC/HFC provided that they meet the conditions contained in the scheme. The trust may have an allocation of up to 30% to NBFCs/HFCs with an asset size of 1000 crore rupees or less.

Rate of Return and Collateral

Rate of return and other particulars under the scheme will be based most likely on mutual negotiation between the NBFCs and the trust. The yield on securities invested by the SPV will be decided by the Investment Committee as per the provisions of the scheme. 

Financial implication for the Central government

The direct financial implication for the central government is five crore rupees, which may be the equity contribution to the SPV. Apart from that, there may not be any financial implication for the central government until the guarantee involved is invoked.

However, it may be noted that on invocation, the extent of government facility shall be equal to the amount of default subject to the guarantee ceiling that is set at 30000 crore rupees.

What is the period of the scheme and the period of lending?

As far as the period of the special liquidity scheme is concerned, it will remain open for three months until 30^th September 2020 for making subscriptions by the trust. 

The period of lending by the trust will be for a period of up to 90 days. 

Conclusion

Also, read: Special Liquidity Scheme: Announcement by FM to Support NBFCs amid Covid-19