Amid the fight with Corona Virus pandemic Prime Minister Narendra Modi introduced Atma Nirbhar Bharat Abhiyan , the self- reliant mission which is about 10% of India’s GDP. The 20 lacs crore reliefs is one of the huge economic stimulus announced by nation around the world.
This 20 trillion package was announced on May 12, 2020 out of which 30,000 crore is kept reserved for Non Banking Financial Companies (NBFCs) , Housing Finance Companies (HFCs) and Microfinance Institutions (MFIs).
The global lockdowns imposed to check spread of COVID-19 is causing a economic turmoil that is supposed to be worst since the 1930s, nations around the world have announced what came to be known as 'coronavirus stimulus packages'. However unlike United States the 20 lac crore package does include the spending of around 1.7 lac crore in March and further liquidity support by Reserve Bank of India.
What are the Special Liquidity Schemes?
On Wednesday May 13,2020 Finance Minister Nirmala Sitharaman took a welcome step towards the stressed NBFC sector by introducing a special liquidity scheme. This announcement was made in the press conference where she elaborated the 20 lac crore relief package along with a declaration of 45000 crore towards Non-Banking Financial Companies (NBFCs) , Housing Finance companies( HFCs) and Micro Financial Institutions( MFIs).
Defining Non-Banking Financial Companies- A NBFC or Non Banking Financial Company is One which performs most of the functions of a bank like providing loans ,financial leasing or hire purchase but cannot accept public deposits by allowing people to open savings or current accounts with it .A NBFC also cannot issue cheques and draft.
FEATURE OF THIS SPECIAL LIQUIDITY SCHEME
The scheme ensures investments will be made in both primary and secondary market transactions in investment grade debt paper of these institutions.
The scheme will support the previous initiatives of the government and the central bank to boost liquidity.
The securities under the scheme will be fully guaranteed by the Central government.
According to the government, the scheme would provide liquidity support to mutual funds along with NBFCs, HFCs and MFIs and create confidence in the market.
Aiding further, the government has also announced Rs 45,000 crore partial credit guarantee scheme for NBFCs.
Partial Credit Guarantee Scheme
Along with credit support to NBFCs Finance Minister has also expanded the PCGs that is infusing liquidity of Rs 45000 crore to enable the NBFCs to extend loans and advances to MSMEs and individuals.
The Finance Minister in the Press Conference said that the institutions are finding it tough to raise money from the debt market amid this crisis hence the scheme will act as helping hand to hold the institutions.
The existing PCGS will be extended to cover borrowings such as primary issuance ofbonds/commercial papers (liability side of balance sheet) of such entities.
First 20 per cent of loss will be borne by the guarantor, that is the government. She said that AA-rated papers and below, including unrated papers, will be eligible for investment (especially relevant for many MFIs).
NBFC CRISIS AND THE NEED
When the Infrastructural Leasing & Financial Services scandal happened those that got caught were the debenture holders of the company- pension fund, mutual fund and the lenders from the NBFCs who had lent to IL&FS. The reality was that 40% of the incremental consumer financing in previous year was done by the NBFCS, not banks, 25 - 30% of the NBFC money was coming through funding or Mutual Funds spots.
Mutual Funds used to buy their (NBFCs) papers for 90-120 days and give them money and this used to used to roll over. Secondly , they used to place bonds or mutual fund spots in the market, 45-50% of the NBFC financing was coming from Mutual funds at that time. But, because mutual funds like DSP, HDFC and others were hit by the IL&FS scam, they stopped their funding to the NBFC. When they stopped funding, the NBFCs had to release the money to pay back whatever is maturing.
The exposure to the NBFC sector came down hence IL&FS happened in the quarter of October-Dec, 2018 which saw a decline in consumption and decline in its financing and subsequently, the GDP growth rate in Jan-March came down to 5.6 %.
It saw the impact there. In the month of October, November and December, late former finance minister Arun Jaitley was not well, so there was not much of action happening. RBI was not even thinking about it because it was undergoing some changes.
The market representatives went to meet the government to talk to it about the liquidity crisis they are faced with all the time. But, the RBI went on reducing interest rate saying that there was liquidity in the banking system.
This scheme focuses to help address temporary liquidity or cash flow mismatch issues of otherwise solvent NBFCs or HFCs without them having to resort to distress sale of assets for meeting their commitments.
Conclusion
The entire scenario bring us to question that whether the objective for which the packages are provided and liquidity infused will reach to the bottom.
To find the answer one needs to wait and see how banks respond towards the government effort , the ball is in banks court right now . It is up to them whether they opt to pass the benefits as required or will choose huge companies to enjoy the perk. To sum up, the government has addressed a long-standing problem of smaller NBFCs, MFIs and MSMEs , which the banks most likely neglect at their best.
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