The government will use Reserve Bank of India (RBI) money to support struggling non-banking financial companies (NBFC), but only for three months, the Union Cabinet said on Wednesday.
Against the industry expectation of longer-term support — NBFCs were expecting two-three years — the government will buy bonds maturing in three months.
Also, the government’s partial credit guarantee scheme will also be for commercial paper (CP) that matures 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, 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 managing director, Mahindra & Mahindra Finance.
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Statements the Press Information Bureau (PIB) released showed this was no direct purchase of bonds as Finance Minister Nirmala Sitharaman had announced as part of the stimulus. It is 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 to the RBI.
With the proceeds of this issuance, the SAF will buy bonds of NBFCs and housing finance companies (HFCs) with a residual maturity of three months.
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“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 this purchase scheme, unlike the partial credit guarantee scheme, would help NBFCs continue with their existing portfolios 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 NBFCs to get investment grade or a better rating for the bonds issued,” the government said, adding that it would be easier to operate and also augment the flow of funds from the non-banking sector.
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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 of the benefit, as well as relaxed norms to let an NBFC to tap the facility if it has been profitable even once in the last three financial years.
Earlier, this facility was available for NBFCs that were profitable at least once in the last two years.
Raman Aggarwal, co-chairman of the Finance Industry Development Council (FIDC), an NBFC lobby group, termed the scheme a “non-starter”.
“The special liquidity scheme is a disappointment. The funds will be made available for a tenor of up to three months. Most 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.
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“Even in the partial credit guarantee scheme 2.0, the tenor is only up to one year, whereas it should have been provided for up to three years,” Aggarwal said.
Karthik Srinivasan, senior vice-president, ICRA, said this was giving another three months to some smaller NBFCs that are not in a position to mobilise money from banks and debt capital markets on their own.
“Entities which have debt repayments in the near term and are unable to refinance them may avail of this facility. As of now, it seems like a short-term liquidity measure for NBFCs. The number of NBFCs availing of this scheme will depend on the rate and amount they are getting,” Srinivasan said.
