India Sets Up Fund to Ease Cash Crunch at Shadow Lenders

India’s largest bank will indirectly buy debt from shadow lenders to ease a cash squeeze that threatens to destabilize the South Asian nation’s financial sector.

SBI Capital Markets Ltd., a unit of State Bank of India, will set up a fund to manage this operation, the central bank said in a statement Wednesday. The fund will purchase investment-grade commercial paper and bonds with a residual maturity of three months or less and the shadow lenders will use the money to repay existing obligations.

The Reserve Bank of India didn’t say how much money will be poured into the fund or who will offer the cash. Under the fineprint of a plan published by the Finance Ministry in May, a similar structured fund would raise cash by selling as much as 300 billion rupees ($4 billion) of government-guaranteed bonds to the RBI, and the government would backstop losses, though it’s unclear if that proposal has since been amended.

Read more about the government’s proposal here

Indian shadow banks have been reeling amid the Covid-19 pandemic, which prompted India to implement the world’s biggest lockdown to prevent the spread of the virus. The financiers focus on riskier borrowers, and that often exposes them to a greater chance than banks that their assets will sour in a downturn.

The special fund will stop buying after Sept. 30, and would recover all dues by Dec. 31 unless notified otherwise, the RBI said.

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