Special Liquidity Scheme for NBFCs, HFCs and MFIs

Union Cabinet has approved the launch of new Special Liquidity Scheme for NBFCs, HFCs and FMIs to improve their liquidity position.

Special Liquidity Scheme for NBFCs, HFCs and MFIs

Source | Press Information Bureau

GS Paper II: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Context: Union Cabinet has approved the launch of new Special Liquidity Scheme for NBFCs, HFCs and FMIs to improve their liquidity position.

  • It had 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).

Read More: NBFCs seeks RBI Permission to use Reserves

Key Highlights of the new Special Liquidity Scheme for NBFCs

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

Also Read: Emergency Credit Line Guarantee Scheme (ECLGS)

How this Scheme would be implemented?

  • For the purpose of implementation of the Scheme, a large public sector bank would set up an SPV to manage a stressed asset fund which would issue interest bearing special securities guaranteed by the Government of India, to be purchased by RBI only.
  • The SPV would issue securities as per requirement subject to the total amount of securities outstanding not exceeding Rs. 30,000 crore to be extended by the amount required as per the need.
  • The securities issued by the SPV would be purchased by RBI and proceeds thereof would be used by the SPV to acquire the debt of at least investment grade of short duration (residual maturity of upto 3 months) of eligible NBFCs / HFCs.

How this Scheme would benefit the NBFCs, HFCs or MFIs?

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 or HFCs or MFls.

Read More: Partial Credit Guarantee Scheme | Govt eases norms

PRELIMS Background Bites

About NBFCs

A Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business.

However, it does not include any institution whose principal business is that of agriculture, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

  • The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 and the directions issued by it.
  • On November 9, 2017, Reserve Bank of India (RBI) issued a notification outlining norms for outsourcing of functions/services by Non-Bank Financial Institution (NBFCs).
  • As per the new norms, NBFCs cannot outsource core management functions like internal audit, management of investment portfolio, strategic and compliance functions for know your customer (KYC) norms and sanction of loans.

Different types of Committees to Review existing framework of NBFCs are:

  • James S. Raj Committee: In June 1974, study group recommended ban on Prize Chit and other Schemes and directed the Parliament to enact a bill which ensures uniformity in the provisions applicable to chit funds throughout the country.
  • Chakravarty Committee: In December 1982, Dr Manmohan Singh, Governor of RBI appointed committee under the Chairmanship of ‘Prof. Sukhamoy Chakravarty’ to review functioning of monetary system in India.

What is the difference between the Banks and the NBFCs?

NBFCs perform functions similar to that of banks but there are a few differences-

  • Provides Banking services to People without holding a Bank license.
  • An NBFC cannot accept Demand Deposits.
  • An NBFC is not a part of the payment and settlement system.
  • An NBFC cannot issue Cheques drawn on itself.
  • Deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks.
  • An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.).
  • An NBFC cannot indulge Primarily in Agricultural, Industrial Activity, Sale-Purchase, Construction of Immovable Property.
  • In case of an NBFC, foreign investment up to 100 % is allowed.
  • An NBFC accompanies working in Financial Body and Money handling.

Also Read: Measures by RBI for Financial Stability

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