The government will use Reserve Bank of India (RBI) money to support the struggling non-banking financial companies (NBFC), but only for three months, the Union Cabinet decided on Wednesday. Against the industry expectation of a longer term support — NBFCs were expecting two-three years — the government will buy bonds maturing within just three months. Moreover, the government’s partial credit guarantee scheme will also be aimed at commercial papers (CP), which mature within a year.
“The industry was looking for long-term funds so that we don’t run into an asset-liability mismatch. And if somebody was to draw three-months money, then they will have to create another liability at the end of 90 days to able to repay this. The industry request was to have a three year tenor,” said Ramesh Iyer, vice chairman and MD of Mahindra & Mahindra Finance. Statements released by the Press Information Bureau (PIB) also showed that this is no direct purchase of bonds as Finance Minister Nirmala Sitharaman had announced as part of the stimulus. However, it is again a kind of guarantee scheme. The government will contribute Rs 5 crore as equity for a special purpose vehicle (SPV), which will be created by a large public sector bank. This SPV will manage a stressed asset fund (SAF), which will issue interest bearing special securities guaranteed by the Government of India to the RBI. ALSO READ: How the lockdown could be creating an economic data vacuum in India With the proceeds of this issuance, the SAF will buy bonds of NBFCs and housing finance companies (HFC) with a residual maturity of three months. “There is no financial implication for the government until the guarantee involved is invoked,” a PIB statement said. On invocation, the extent of government liability would be equal to the amount of default subject to the guarantee ceiling. The ceiling for now has been set at Rs 30,000 crore, and will be administered by the Department of Financial Services. The government hoped that this purchase scheme, unlike the partial credit guarantee scheme, will help NBFCs continue with their existing portfolio without getting into bilateral arrangements with multiple lenders. “The proposed scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio. The scheme would also act as an enabler for the NBFC to get investment grade or better rating for bonds issued,” the government said, adding that it will be easier to operate and also augment the flow of funds from the non-bank sector. ALSO READ: Interest rates charged by banks capped at 9.25% under MSME package The Cabinet also modified its previous schemes on partial credit guarantee on the first 20 per cent of losses for commercial papers (that mature within a year) issued by NBFCs rated AA and below, or even unrated NBFCs. Among other modifications, it allowed stressed category NBFCs to avail the benefit, as well as relaxed norms to let NBFCs to tap the facility if it has been profitable even once in the last three financial year. Earlier, this facility was available for NBFCs that were profitable at least once in the last two years. Raman Aggarwal, Co-Chairman of Finance Industry Development Council (FIDC), a NBFC lobby group, termed the scheme a ‘non-starter’. “The details of the special liquidity scheme has come as a disappointment. The funds will be made available for a tenor of upto three months. While majority of the lending done is for a tenure of two-three years and so in order to prevent any asset liability mismatch the expectation was for a tenure of three years,” Aggarwal said. “Even in the partial credit guarantee scheme 2.0, the tenor is only up to 1 year, whereas it should have been provided for up to 3 years,” Aggarwal said. ALSO READ: RBI refuses a dozen licences to NBFCs with investments from Mauritius “This is basically giving another three months’ time to some of the smaller NBFCs which are not in a position to mobilise funding from banks and debt capital markets on their own,” said Karthik Srinivasan, Senior VP, ICRA. “Entities which have some debt repayments in the near term and are unable to refinance it, they may look to avail of this facility. As of now, it seems like a short term liquidity measure for the NBFCs. The number of NBFCs availing this scheme will depend on the rate and the quantum they are getting,” Srinivasan said. How the scheme will work: — A large public sector bank to float a SPV — Union Govt will infuse Rs 5 crore as equity in the SPV — The SPV will launch a stressed asset fund (SAF) — SAF will issue govt-guaranteed securities to RBI — The proceeds will be used to buy NBFC bonds maturing in three months