India Approves Special Purpose Vehicle To Help Shadow Lenders Raise Capital

India approved setting up a new entity to provide liquidity to non-bank financial companies under the government’s fully-guaranteed support to help stressed shadow lenders.

The special purpose vehicle will issue securities, guaranteed by the government of India, according to the plan approved by the Union Cabinet. The Reserve Bank of India will purchase this paper and a stressed asset fund of the SPV will invest the proceeds in the short-term debt of NBFCs.

While the government will infuse Rs 5 crore equity into the SPV, its liability will be equivalent to a default by a non-bank or a mortgage lender which raises money through the special purpose vehicle. The guarantee is, however, capped at Rs 30,000 crore under the measure announced by Finance Minister Nirmala Sitharaman as part of the Covid-19 relief package.

The measure would help NBFCs to get investment-grade or better rating for bonds issued, said a government statement.

What’s In The Scheme

• A large public sector bank would set up the SPV to manage a stressed asset fund, which would issue interest-bearing special securities.
• Securities to be issued based on requirement, subject to a cap of Rs 30,000 crore on total outstanding.
• The securities would be purchased by RBI, and proceeds would be used by the SPV to acquire the investment-grade debt of up to three-month duration of eligible NBFCs.

The scheme is an RBI-initiated step to infuse liquidity in NBFCs, a senior government official told BloombergQuint on the condition of anonymity. The central bank will purchase the securities issued by the SPV as the law does not allow the RBI to directly infuse money or liquidity in these entities, the official said.

Modified Partial Guarantee Scheme

The government also approved extension of Partial Credit Guarantee Scheme with changes to make more NBFCs eligible.

• Scheme extended from June 30, 2020 to March 31, 2021 for purchase of pooled assets.
• NBFCs or mortgage lenders reported under SMA-1 category on technical reasons alone during one year prior to Aug. 1, 2018, will now be eligible.
• The criteria of net profit relaxed to include non-bank lenders that have reported a profit in at least one of the last three financial years.
• Loan pools originated six months prior to rating can qualify under the scheme. Earlier, asset originated before March 2019 qualified.
• The scheme would now cover purchase of bonds and commercial paper with ‘AA’ and below rating as against just pooled assets earlier.

Emergency Credit Line For MSMEs

The cabinet approved a 100 percent credit guarantee on collateral- free loans up to Rs 3 lakh crore to MSMEs, and interested MUDRA borrowers, through an Emergency Credit Line Guarantee Scheme.

The guarantees under the scheme will be provided by the National Credit Guarantee Trustee Company Ltd., for which the government will contribute Rs 41,600 crore worth of capital over the current and following three financial years, the statement said.

Last week, the Small Industries Development Bank of India had issued a draft guideline stating that a special purpose vehicle or a trust could operate the scheme with the government making an initial contribution of Rs 15,500 crore. Under the scheme:

• Loans to MSMEs under the Guaranteed Emergency Credit Line, which has been provided by various banks in the wake of economic impact due to Covid-19, would also be eligible for the 100 percent government guarantee.
• MSMEs with outstanding loans of up to Rs 25 crore as on Feb. 29, 2020 and with an annual turnover Rs 100 would be eligible for such borrowing.
• Borrowers in default of less than or equal to 60 days past due as on Feb. 29, 2020 are eligible. Meaning, Special Mention Accounts-0 and SMA 1 accounts are also eligible.
• MSMEs can avail additional working capital loans and term loans up to 20 percent of their outstanding credit up to Rs 25 crore.
• Term loans provided for a four-year period, with a 12-month moratorium on the principal.
• Lenders will not be charged guarantee fees by the NCGTC.
• Interest rates for banks and other financial institutions will be capped at 9.25 percent, and at 14 percent for NBFCs.
• Scheme will be available until Oct. 31, 2020 or till the total Rs 3 lakh crore guarantees have been sanctioned.