Cabinet approves Special Liquidity Scheme for NBFCs/HFCs to address their Liquidity Stress

The Union Cabinet has given its approval to the proposal of the Ministry of Finance to launch a new Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to improve the liquidity position of the NBFCs/HFCs.

Details of the Scheme

• The Government has proposed a framework for addressing the liquidity constraints of Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) through a Special Liquidity Scheme.
• A Special Purpose Vehicle would be set up to manage a Stressed Asset Fund (SAF) whose special securities would be guaranteed by the Government of India and purchased by the Reserve Bank of India (RBI) only.
• The proceeds of the sale of such securities would be used by the SPV to acquire short-term debt of NBFCs/HFCs.
• The Scheme will be administered by the Department of Financial Services, which will issue the detailed guidelines.

Impact

• The proposed Scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio.
• The Scheme would also act as an enabler for the NBFC to get investment grade or better rating for bonds issued.
• The Scheme is likely to be easier to operate and also augment the flow of funds from the non-bank sector.

Benefits

• This facility would supplement the liquidity measures taken so far by the Government and RBI.
• The Scheme would benefit the real economy by augmenting the lending resources of NBFCs/HFCs/MFls.

Background

• It has been announced in the Budget Speech of 2020-21 that a mechanism would be devised to provide additional liquidity facility to NBFCs/HFCs over that provided through the Partial Credit Guarantee Scheme (PCGS).
• There is an urgency to implement the above Budget announcement to strengthen financial stability on account of the emerging situation of Covid-

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