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Special Liquidity Scheme for NBFCs and HFCs

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Special Liquidity Scheme for NBFCs and HFCs

Context:

RBI announces special liquidity scheme for NBFCs and HFCs through a Special Purpose Vehicle (SPV) to avoid any potential systemic risks to the financial sector.

Background:

Finance Minister had announced on 13th March 2020, launch of a Special Liquidity Scheme of Rs. 30,000 crore.

Key features of the scheme:

  • RBI will provide funds for the Scheme by subscribing to government guaranteed special securities issued by the Trust.
  • The total amount of such securities issued outstanding shall not exceed Rs. 30,000 crores at any point of time.
  • Government of India will provide an unconditional and irrevocable guarantee to the special securities issued by the Trust.

Who is eligible?

NBFCs, including Microfinance Institutions that are registered with the RBI, under the Reserve Bank of India Act, 1934, excluding those registered as Core Investment Companies.

Housing Finance Companies that are registered under the National Housing Bank Act, 1987.

Other eligibility criteria:

  • CRAR/CAR of NBFCs/HFCs should not be below the regulatory minimum, i.e., 15% and 12% respectively as on March 31, 2019.
  • The net non-performing assets should not be more than 6% as on March 31, 2019.
  • They should have made net profit in at least one of the last two preceding financial years (i.e. 2017-18 and 2018-19)
  • They should be rated investment grade by a SEBI registered rating agency.

Implementation:

  1. SBICAP which is a subsidiary of the State Bank of India has set up a SPV (SLS Trust) to manage this operation.
  2. 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.
  3. The instruments will be CPs and NCDs with a residual maturity of not more than three months and rated as investment grade.

Way ahead:

  • The Scheme will remain open for 3 months for making subscriptions by the Trust.
  • The period of lending (CPs/NCDs of NBFCs/HFCs for short duration of upto 90 days) by the Trust shall be for a period of upto 90 days.
  • The financing would be used by the NFBCs/HFCs only to repay existing liabilities and not to expand assets.

Prelims Link:

  1. What are NBFCs?
  2. NBFCs vs Commercial Banks.
  3. Special Liquidity Scheme for NBFCs and HFCs- implementation.
  4. What are core investment companies?
  5. RBI Act of 1934.

Mains Link:

Discuss the significance of Special Liquidity Scheme for NBFCs and HFCs.

Sources: pib.