Context: Recently, 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.
Key Points

• RBI will provide funds for the Scheme by subscribing to government guaranteed special securities issued by the Trust.
• Government of India will provide an unconditional and irrevocable guarantee to the special securities issued by the Trust.
• The Scheme is being launched through a Special Purpose Vehicle (SPV) in the form of SLS Trust set up by SBI Capital Markets Limited (SBICAP).
• The proceeds of 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 (Ministry of Finance).

To be eligible under the scheme, RBI laid out the conditions

• The Non-Banking Financial Company (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
• 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 not have been reported under SMA-1 or SMA-2 category by any bank for their borrowings during last one year prior to August 01, 2018
• They should be rated investment grade by a SEBI registered rating agency.
• They should comply with the requirement of the SPV for an appropriate level of collateral from the entity, which, however, would be optional and to be decided by the SPV.

Benefits

• Unlike the Partial Credit Guarantee Scheme, NBFCs/ HFCs do not have to liquidate their current asset portfolio under this scheme.
• Current assets are all the assets of a company that are expected to be used as a result of standard business operations over the next year.
• The scheme would also act as an enabler for the NBFC to get investment grade for bonds issued.
• The Scheme would benefit the real economy by augmenting the lending resources of NBFCs/HFCs/MFls.
• This facility would supplement the liquidity measures taken so far by the Government and RBI.

Financial implication

• The direct financial implication for the Central government is Rs. 5 crore, which may be the equity contribution to the SPV.
• 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, which has been set at Rs. 30,000 crore.