On July 1, 2020, the Reserve Bank of India (RBI), approved a scheme to improve the liquidity of certain organizations. It said that certain Non-Banking Financial Companies (NBFCs) and/or Housing Finance Companies (HFCs) can apply for a scheme of financial revitalization launched by the RBI under a Special Purpose Vehicle (SPV) established by the State Bank of India (SBI). The SPV will purchase short-term papers from the above-mentioned organisations, and the resulting proceeds of such purchase shall be utilised by them to extinguish existing liabilities. The NBFCs/HFCs eligible to avail the scheme must adhere to certain conditions as follows:
- The NBFCs and HFCs must be registered under their respective parent statutes.
- The Capital to Risk Assets Ratio (CRAR) and Capital Adequacy Ratio (CAR) for NBFCs and HFCs shouldn't be below 15% and 12% respectively.
- The net Non-Performing Assets (NPAs) shouldn't be below 6%.
- They should have made a net profit in at least one of the two preceding financial years.
- They shouldn't have been reported under SMA-1 or SMA-2 category by any bank for their borrowings during the year prior to August 1, 2018 (Special Mention Account).
It is apparent that the scheme is an attempt by the government to help salvage the losses and existential crises borne to the NBFCs/HFCs as a consequence of the ongoing lockdowns and prevailing economic slump gathered since the previous year. It was, however, clarified that the SPV will make purchases till September 30, 2020.
The first concern that arises is with regard to the usability of the scheme. Banks and financial institutions are witnessing a major recession and the NBFCs have been especially vulnerable to crises in recent years. What is needed for their revival is a comprehensive stimulus package, which has already been extended under the Rs. 30,000-crore liquidity package for NBFCs, HFCs, etc. as part of the Atmanirbhar Bharat Abhiyan. Thus, the present scheme, although intended to support these organisations, seems rather superfluous.
Secondly, the scheme is operational for only three months, implying its focus on short-term credit and financial compulsions that may have accrued to the NBFCs. Therefore, it only intends to iron out the temporary liquidity wrinkles faced by the organisation and not attempt at finding a radical and systematic solution to cap losses over long fiscal terms.
Thirdly, the conditions laid out for eligibility under the scheme are seemingly redundant in light of the underlying objective of the scheme. Organisations which generally adhere to the prescribed regulatory lower limits of CRAR/CAR, have steadily maintained profits in the last two fiscal years and have managed not to list themselves under the special mention category. They are thus, evidently, not facing an imminent existential crisis. They may be financially stressed and not performing up to satisfaction, but they don't require interim interventions such as this to preserve their financial health.
Finally, the structure of the scheme is put to question on account of the SPV's modalities. Instead of purchasing bonds from the NBFCs directly, the government has set up the SPV which in turn will buy securities in the form of commercial papers (CPs) and non-convertible debentures (NCDs) from the NBFCs/HFCs. Although a sum of Rs. 5 crores have been sanctioned for the SPV initially, there is no telling what the total quantum of guarantees might stretch to. That will depend upon the number of NBFCs which invoke the government's guarantee on those instruments given under the scheme. The ceiling on aggregate guarantee has been set at Rs. 30,000 crores which is incidentally the same as that of the liquidity package. If, however, the collectively invoked amount surpasses the ceiling, the government will be heavily leveraged to obviate those guarantees.
What we need is added clarification and release of more information on the workability and timelines of the scheme. There must be an illustrative assessment of the present needs of financial institutions. Care must be taken to redesign the scheme in a manner that it is neither in excess to existing schemes nor too inadequate to cater to reasonable benefits, which is what the scheme exemplifies in its present shape.
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