In this article, we will be talking about the various provisions of the Companies Act, 2013 rel...
Amid the crisis of Covid-19 epidemic, Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), and Microfinance Institutions (MFIs) have been facing difficulties in smooth credit flow. Of late, this sector has been in the doldrums due to lack of availability of credit.
On 13th May 2020, the honourable Finance Minister, Smt. Nirmala Sitharaman has proclaimed to give a Special Liquidity Scheme of Rs. 30,000 crore for NBFCs, HFCs and MFIs. With this, the Government’s aim is to provide full guarantees on investments in debt securities issued by non-bank lenders.
This scheme has been invoked to benefit the NBFCs and provide credit support to the sector. It has been provided that under this scheme, the investment shall be allowed under both primary and secondary market transactions in terms of investment-grade debt papers of these institutions, i.e., NBFCs, HFCs and MFIs.
Such securities issued by NBFCs will be risk-free and fully backed by the Government of India. Thus, it will ease the difficulty faced by such non-banking financial institutions to raise money from the debt markets. This scheme will ultimately generate demand for securities issued by NBFCs and other non-bank lenders, which in turn, will offer liquidity to them.
As NBFCs play an important role in meeting the fund requirements of Micro, Small and Medium Enterprises (MSMEs), such move to strengthen the liquidity position of NBFCs will directly impact the MSME sector and will positively keep the network of MSMEs intact and functional.
In addition to the Special Liquidity Scheme, the Finance Minister has also announced the expansion of the existing partial credit guarantee scheme (PCGS).
Under the scheme (partial credit guarantee scheme 2.0), an infusion of Rs. 45,000 crore liquidity will be made to NBFCs, HFCs and MFIs. This will further enable the NBFCs to extend loans and advances to MSMEs and individuals.
The existing PCGS shall be extended to cover borrowings such as primary issuance of bonds/commercial papers. Via this scheme, lower-rated and unrated securities will be eligible for relief.
The NBFCs which are not highly rated or low rated were reported to have been facing more problems in the generation of resources in comparison to the others. This scheme will particularly benefit such low-rated NBFCs since papers with a rating of AA and below, including unrated papers will be eligible for investment.
The Government Guarantee will be provided to Public Sector Banks for the purchase of assets by them from financially sound NBFCs, HFCs and MFIs. The guarantee will be limited to the extent of the first loss of up to 20 per cent of the fair value of assets purchased by the PSBs. With this, particularly, the Government’s aim is to provide partial guarantees on investments in debt securities issued by non-bank lenders.
It will help to address temporary liquidity/cash flow mismatch problems of otherwise solvent NBFCs and HFCs. It will prevent them from having to resort to distress sale of their assets for meeting their financial commitments.
This scheme will provide liquidity to the NBFCs / HFCs, which will work towards the financing of credit demands of the economy, especially MSMEs.
As the Government is going to provide a 100 per cent guarantee to the debt papers, the interested banks and other institutions will find safer to subscribe to these securities. Therefore, these steps which were taken by the Government, particularly “Special Liquidity Scheme”, can be considered as a move in the right direction.
Apart from the implementation of Special Liquidity Scheme and expansion of existing PCGS, the Indian Government has also taken a variety of economic measures as part of “Atmanirbhar Bharat economic package”. Some of these include Rs. 3 lakh crore emergent ‘Working Capital Facility’ for businesses including MSMEs in the form of collateral-free, automatic loans that will give facility to them; Provision of Rs. 20,000 crore subordinated debts for stressed MSMEs; Rs. 50,000 crore equity infusion through MSME Fund of Funds; Collateral free loan to be provided to MSMEs with 12 month moratorium; All receivables of MSMEs to be cleared by the Government and PSUs in 45 days; Tenders up to Rs. 200 crore global tenders shall be disqualified; Due date of all ITR for FY 2019-20 extended from 31st July, 2020 & 31st October, 2020 to 30th November, 2020; Period of Vivad se Vishwas Scheme for making payment without additional amount extended to 31st December, 2020, etc.
It is expected that these steps will help struggling NBFCs in the procurement of required resources for their businesses and to gain confidence in the market. Thus, it will enable them to continue contributing to credit creation and spur economic growth as a whole.
Also, Read: Impact on Start-ups Business amidst Coronavirus.