India’s shadow banks believe the special liquidity scheme announced as part of the Rs 20 lakh crore Atma Nirbhar Bharat Abhiyan package is a “non-starter”, as it only provides very short term liquidity relief.
Earlier today, the
Cabinet had approved a Rs 30,000 crore “special liquidity scheme” for non-banking finance companies (NBFCs), and housing finance companies (HFCs) to help with their liquidity position.
“This scheme is just not doable. Simply put, for an NBFC - if somebody is going to take 3 months of money, where is there going to be liquidity at the end of 90 days to repay it? Then this will also start to default in some form. There is no rationale for this 90-day money,” said a senior executive from a Mumbai-based NBFC on the condition of anonymity.
The government, as per the details released by the Press Information Bureau, proposes that a large public sector bank set up an SPV 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.
The proceeds of the sale of such securities will be used by the SPV to acquire short-term debt (with residual maturity of up to 3 months) of NBFCs/HFCs.
The SPV would issue securities as per requirement, subject to the total amount of securities outstanding not exceeding Rs 30,000 crore, the press release stated.
“On invocation (of guarantee), the extent of government liability would be equal to the amount of default subject to the guarantee ceiling. The ceiling of aggregate guarantee has been set at Rs. 30,000 crore, to be extended by the amount required as per the need," it added.
Gagan Banga, MD & CEO of Indiabulls Housing Finance told CNBC-TV18, “I think the intention is to continue to roll over till liquidity normalizes and short term risk of default by any NBFC gets eliminated.”
Banga said it was a good step to strengthen the regulatory hands if they wished to intervene in case of a “red flag” situation.
“Market need not worry any longer of any default in the short to medium term. Else market is assuming anything which is non-AAA is junk,” he said.
“The real requirement is for 24-36 months, assuming things normalize in a few months. If you want to avoid any Asset-Liability Mismatch, then minimum 30-months or so of money should have been offered,” opined the head of another NBFC who did not wish to be quoted.
This person further said, ”This could help some illiquid NCD or CP for roll over purposes at best.”
Some others in the industry believe that perhaps the thinking behind offering 3-month money would be to cover liabilities over the three-month moratorium where borrowers are not repaying.
“Since people have given three-month moratorium to customers, and therefore it may take another three months to get that money, so they need short term funds to discharge liabilities- that may be the thinking behind offering only 3 months of debt relief. I am just speculating, I don’t know what went behind allowing only three months,” reasoned the head of another large NBFC.
“This special liquidity scheme of Rs 30,000 crore is a big disappointment and a non-starter,” said Raman Agarwal, Chairman of Finance & Development Corporation.
“The majority of the lending done is for a tenure of 2-3 years and so to prevent any asset-liability mismatch, the expectation was for a tenure of 3 years,” he added.
Finance Minister Nirmala Sitaraman on May 13 had announced this Rs 30,000 crore special liquidity facility for non-banks as part of the Rs 20 lakh crore “stimulus package”. Sitharaman, while making the announcement, said it was “to help struggling NBFCs to carry on with business and keep their network of MSMEs served.”
The direct financial implication for the government for this scheme is Rs 5 crore, which would be the equity contribution to the SPV.Karthik Srinivasan, Senior Vice President & Group Head- Financial Sector Ratings at ICRA said, ”The said measure will only provide a short term liquidity cushion and not a medium or long term one as anticipated. Let's wait for the detailed guidelines to be issued by DFS. Also hope the benefits of government guarantee in this scheme is largely utilised by the smaller and / or lower rated entities.