Finance Minister Nirmala Sitharaman (File image: Reuters)
The details of the Rs 30,000 crore special liquidity facility for non-banking finance companies (NBFCs) and housing finance companies (HFCs), announced by Union Finance Minister Nirmala Sitharaman as part of the Rs 20 lakh crore economic package, has shocked the industry. Under the scheme, the funds offered are only for a three-month tenure. The industry was expecting liquidity support for at least three years.
“We are completely disappointed. With a 3-month repayment period, this scheme is a non-starter. No NBFC will be able to repay money back in that short period,” said Raman Agarwal, co-chairman of Finance Industry Development Council (FIDC), a representative body of NBFCs. “Had the government consulted with NBFCs, this would not have happened,” said Agarwal.
On Wednesday, the government issued the details of the Rs 30,000 crore special liquidity scheme for non-banking finance companies and housing finance companies following Cabinet approval. The scheme was first announced by the finance minister in the 2020-21 budget speech and later fast-tracked as part of the COVID-19 economic package.
According to the details put out in the public domain by the government today, the scheme will be implemented through a special purpose vehicle (SPV) set up by a large PSU bank. This SPV will issue bonds guaranteed by the government which will be purchased by the Reserve Bank of India. The money will be then used by the SPV to acquire the debt of at least investment grade of short duration (residual maturity of up to 3 months) of eligible NBFCs / HFCs, the government said.
“There is no point in borrowing money for three months. This didn’t require a government scheme. We anyway borrow money from the market for such short tenures,” said an NBFC industry official.
According to the government notification, the direct financial implication for the government is Rs 5 crore, which may be the equity contribution to the SPV. Beyond that, there is no financial implication for the government until the guarantee involved is invoked. However, on invocation, the extent of government liability would be equal to the amount of default subject to the guarantee ceiling.
NBFCs, especially smaller ones, are struggling for liquidity after COVID-19 impacted the economy and lenders resorted to invest only in AAA-rated papers fearing default. This created liquidity woes for the smaller NBFCs, MFIs and HFCs. Borrowing money for three months will also create a huge asset-liability mismatch for NBFCs, industry representatives fear. “We lend for longer tenures, say at least 3 years and sometimes for 10-15 years. How does borrowing for three months make sense for us,” said P Satish, executive director of Sa-Dhan, an industry body of NBFC-MFIs.
Under the economic package, Sitharaman announced schemes worth Rs 75,000 crore for NBFCs. Besides Rs 30,000 crore, the minister also announced a partial credit guarantee scheme for Rs 45,000 crore. Under the scheme, the first 20 percent of the loss will be borne by the government which will be the guarantor.