Worried over the ineffectiveness of the special liquidity schemes announced by Union Finance Minister Nirmala Sitharaman as part of the Rs 20 lakh crore economic package, non-banking finance companies (NBFCs) have written to the finance minister, requesting to rework the contours of these schemes.
These schemes include Rs 30,000 crore special liquidity facility backed by government guarantee and Rs 45,000 crore partial credit guarantee scheme announced by the FM for non-banking companies.
NBFCs were in for a rude shock when they read into the details of the Rs 30,000 crore special liquidity facility for NBFCs (non-banking finance companies) and HFCs (housing finance companies). Under the scheme, these funds were offered only for a three-month tenure. The industry was expecting liquidity support for at least for three years.
Industry officials pointed out that in the present economic environment, it is tough for these entities to pay back within three months.
Also, NBFCS lend for longer tenures to their borrowers. Hence, borrowing short-term funds will create an asset-liability mismatch (ALM) for these companies. ALM refers to the difference in maturities of inflow and outflow of funds.
“The scheme for liquidity support of Rs 30,000 crore is for a period of only three months and as such cannot be utilised for any on-lending purposes to MSMEs. It can only provide relief to existing holders of short term NBFC debt instruments to sell off their holding and may, in fact, result in no additional cash flow to NBFCs,” wrote Finance Industry Development Council (FIDC) in a letter to Sitharaman on May 20.
Moneycontrol has reviewed the letter.
“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 said in the letter.
“We sincerely request you to extend the tenure of this assistance to three years instead of three months,” said FIDC in the letter.
The cabinet on May 20 spelt out the details of the Rs 30,000 crore special liquidity scheme which was first announced by FM Sitharaman in the 2020-21 budget speech and later fast-tracked as part of the COVID-19 economic package.
According to the details available in the public domain, 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 RBI. The money will then be used by the SPV to acquire the debt of at least investment grade of short duration (residual maturity of up to three 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 who didn’t want to be named.
Similarly, NBFCs have sought extension of tenure for the funds availed under the proposed Rs 45,000 crore partial credit guarantee scheme citing the same issue. “We welcome the decision to extend 20 percent first loss guarantee to NBFC debt and to do away with stringent credit rating norms. This measure can provide significant relief to smaller NBFCs. However, we note that this too is limited to short term instruments of less than one year and as such suffers from similar disadvantages,” FIDC has said in the letter.
According to the government notification, the direct financial implication for the government for implementing the Rs 30,000 crore scheme is only 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 will 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 fearing default resorted to investing only in AAA-rated papers. Also, banks refused to extend the moratorium to NBFCs, while NBFCs extended the same to their borrowers. All this created liquidity woes for the smaller NBFCs, MFIs and HFCs.