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RBI lays down rules for special NBFC, HFC liquidity scheme

On May 20, the Union Cabinet had cleared a proposal to launch a special liquidity scheme for non-banking financial companies (NBFCs) and housing finance companies (HFCs) to improve their liquidity position.

Updated: Jul 02, 2020 06:56 IST

By Shayan Ghosh, Mumbai

NBFCs and HFCs should have made a net profit in at least one of the two preceding financial years , RBI says. (PTI)

Following the Union cabinet’s approval of a special liquidity scheme for non-bank financiers and mortgage lenders in May, the Reserve Bank of India (RBI) on Wednesday laid down the eligibility criteria for these lenders to avail the facility.

On May 20, the Union Cabinet had cleared a proposal to launch a special liquidity scheme for non-banking financial companies (NBFCs) and housing finance companies (HFCs) to improve their liquidity position.

The RBI said on Wednesday that NBFCs and HFCs should not have net non-performing assets (NPAs) of more than 6% as on March 31, 2019. The funds raised by these lenders will have to be solely used to extinguish existing liabilities, RBI said.

“They should have made net profit in at least one of the last two preceding financial years of 2017-18 and 2018-19. They should not have been reported under SMA-1 or SMA-2 category by any bank for their borrowings during last one year prior to 1 August 2018,” RBI said.



Banks classify borrowers into special mention accounts based on their delay in repayment. Special mention account-0 (SMA- 0) loans are where the repayment overdue is between one and 30 days, SMA-1 between 31 and 60 days and SMA-2 from 61 to 90 days. The asset turns NPA after 90 days of being overdue.

The non-bank financiers have been under duress for quite some time now. The risk aversion of lenders and the subsequent liquidity crunch of non-banks began after Infrastructure Leasing & Financial Services (IL&FS) defaulted on its repayment obligations in September 2018.

Under the government proposal, a special purpose vehicle (SPV) would be set up to manage a stressed asset fund where the securities will be guaranteed by the government. The SPV would then issue securities of up to ₹30,000 crore and these would be purchased by RBI. The funds thus received from the sale of securities would be used by the SPV to buy short-term investment-grade papers from eligible NBFCs and HFCs, providing them with some liquidity.

To be sure, this liquidity tap will only help short-term mismatches as the SPV will purchase papers up to three months duration.

A statement from the government had said on 20 May that the direct financial implication for the government is ₹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,” it said, adding that the ceiling of the aggregate guarantee has been set at ₹30,000 crore and could be extended by the amount required as per the need.

RBI said on Wednesday that as per the government decision, SBI Capital Markets, a subsidiary of the State Bank of India has set up a SPV to manage this operation.

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