The Reserve Bank of India (RBI) on Wednesday laid down the eligibility criteria for non-bank financiers and mortgage lenders to utilize a special liquidity scheme that was approved by the Union cabinet in May.
To borrow funds, the RBI rules mandate that non-banking financial companies (NBFCs) and housing finance companies (HFCs) should not have net non-performing assets of more than 6% as on 31 March 2019 and the funds raised will have to be solely used to extinguish existing liabilities.
“They should (also) 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 repaying loans. Special mention account-0 (SMA-0) loans are where the payment overdue is between one and 30 days, SMA-1 between 31 and 60 days and SMA-2 from 61 to 90 days. The asset is termed non-performing after being overdue for 90 days.
Non-bank financiers have been under pressure for some time now. The risk aversion of banks and the subsequent liquidity crunch faced by non-banks began after Infrastructure Leasing and Financial Services Ltd (IL&FS) defaulted on its payment obligations in September 2018.
Under the government proposal, a special purpose vehicle (SPV) has been set up to manage a stressed asset fund where the securities will be guaranteed by the government.
The SPV would 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, the liquidity tap will only help iron out short-term mismatches as the SPV will purchase papers up to three months’ duration.
A statement from the government on 20 May said that the direct financial implication for the government is ₹5 crore, which may be the equity contribution to the special purpose vehicle.
“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 unit of State Bank of India (SBI), has set up a SPV to manage this operation.
The central bank added that the instruments to be bought by the SPV will be commercial papers (CPs) and non-convertible debentures (NCDs) with a residual maturity of not more than three months and rated as investment grade.
However, this facility will not be available for any paper issued after 30 September as the SPV would not make fresh purchases then but would recover all dues by 31 December.
The government had announced in the Union Budget of 2020-21that a mechanism would be devised to provide additional liquidity facility to non-bank lenders over that provided through the partial credit guarantee scheme.