In a bid to mitigate the possibility of a contagion in the financial sector due to the liquidity constraints faced by non-banking finance companies (NBFCs) and housing finance companies (HFCs), the Centre has approved a special liquidity scheme for purchasing short-term debt up to ₹30,000 crore from these entities.
State Bank of India’s subsidiary, SBICAP, has set up an SPV — a Special Liquidity Scheme (SLS) Trust — to purchase short-term papers from eligible NBFCs and HFCs. According to industry estimates, NBFC and HFCs have repayment liabilities of ₹65,000-₹75,000 crore between July and September of this year. There is a worry that some of the liquidity-constrained NBFCs may default on their liabilities, which could pose systemic risks to the entire financial sector.
To avoid such a situation, the newly-created SPV will purchase investment-grade Commercial Papers and Non-Convertible Debentures with a residual maturity of not more than three months. The facility will not be available for any paper issued after September 30, 2020. The SPV will cease to make fresh purchases after this date and will recover all dues by December 31, 2020, or as may be modified subsequently under the scheme. The RBI will provide liquidity to the Trust depending on the actual purchases by the latter. The total exposure of the Trust to the papers will not exceed ₹30,000 crore.
“It will help alleviate some of the liquidity concerns by pushing back the debt repayment by three months. The efficacy of the scheme would be seen only if medium and smaller-sized NBFCs get its benefit,” said Karthik Srinivasan, Senior Vice-President, Group Head - Financial Sector Ratings, ICRA.
The securities (debt) will be fully guaranteed by the government, under the SLS, announced by the Finance Ministry on May 13. The SPV will invest not more than ₹2,000 crore in any one entity. Up to 30 per cent of the allocation will be earmarked for NBFCs/HFCs with an asset size of ₹1,000 crore or less.
“While large and medium-sized NBFCs will benefit, small NBFCs may get excluded as the eligibility condition calls for investment grade rating, which smaller players may not have. Also, the deadline to recover all dues by December 31, 2020, should be extended till March 2021. This is because successive extension of the lockdown has the impacted working of the NBFCs,” said Mahesh Thakkar, Director General, FIDC.
Eligibility criteria
To be eligible under the Scheme, the NBFCs/HFCs should have made a net profit in at least one of the two years — FY18 or FY19. They should not have been reported under SMA-1 (principal or interest payment overdue by 31-60 days) or SMA-2 (61-90 days) by any bank for their borrowings during the year up to August 1, 2018.
NBFCs, including microfinance institutions/HFCs, are required to meet the conditions relating to capital to risk-weighted assets ratio, capital adequacy ratio, and net non-performing assets.
Sharad Mittal, CEO, Motilal Oswal Real Estate Fund, said: “While clear norms have been identified to assess NBFCs/HFCs that will be eligible for this scheme, to what extent each of the entities will be eligible is unclear as of now.”