The Reserve Bank of India's (RBI) notification on July 1 providing details and eligibility criteria for non-banking finance companies (NBFCs) and housing finance companies (HFCs) to avail the Rs 30,000 crore special liquidity scheme confirms that the industry’s demand for longer-term liquidity assistance has been rejected by the government.
As per the notification, liquidity instruments under the scheme will have a maturity of only three months.
Finance Industry Development Council (FIDC), an industry body of NBFCs, in a letter to Finance Minister Nirmala Sitharaman on May 20, had sought a minimum three-year extension in the tenure of these instruments.
This is because NBFCs lend for a longer tenure and hence short term borrowings could create asset-liability mismatches. “It may not have the desired effect of encouraging NBFCs to lend to the MSME sector. Any NBFC availing of funds under this scheme may, in fact, end up disturbing its asset-liability matching,” FIDC had said in the letter.
The RBI notification still talks about a three month repayment period. “Essentially, we were seeking long-term liquidity assistance with a repayment period of at least three years. It appears the government wants to keep this scheme specifically to meet the short-term refinance requirements of NBFCs,” an industry official told Moneycontrol.Eligibility criteria
According to the details released by RBI, net non-performing assets (NPAs) of NBFCs and HFCs and should not exceed 6 percent as on March 31, 2019. Also, capital to risk (weighted) assets ratio (CRAR)/capital adequacy ratio (CAR) of NBFCs/HFCs should not be lower than the minimum regulatory requirement, which is 15 percent and 12 percent, respectively, as on March 31, 2019.
Other conditions include entities need to record a net profit in at least one of the last two fiscal years (FY18 and FY19), should be rated investment grade by a Securities and Exchange Board of India (Sebi) registered rating agency and should not have been reported under the special mention accounts (SMA) 1 or SMA-2 category by any bank for their borrowings during the last one year prior to August 1, 2018.
SBICAP, which is a subsidiary of State Bank of India, has set up a special purpose vehicle (SLS Trust) to manage this operation. The SPV will purchase the short-term papers from eligible NBFCs/HFCs, who shall utilise the proceeds under this scheme solely for the purpose of extinguishing existing liabilities.
The facility will not be available for any paper issued after September 30 and the SPV would cease to make fresh purchases after that date and would recover all dues by December 31; or as may be modified subsequently under the scheme.
The Cabinet on May 20 spelt out the details of the Rs 30,000 crore special liquidity scheme, which was first announced by Sitharaman in her Budget 2020 speech and later fast-tracked as part of the COVID-19 economic package.