Finance minister Nirmala Sitharaman on Wednesday announced further liquidity support to non-banking financial companies (NBFCs), housing finance companies (HFCs) and microfinance institutions (MFIs) by way of a 30,000 crore liquidity scheme and a partial credit guarantee scheme of 45,000 crore.

These stimulus measures come a day after Prime Minister Narendra Modi announced the Atmanirbhar Bharat Abhiyan package worth 20 trillion to kickstart the economy following the covid-19-induced nationwide lockdown.

Under the government’s special liquidity scheme, banks will be allowed to invest, through both primary and secondary market transactions, in investment-grade debt papers issued by NBFCs, HFCs and MFIs. These investments, to the extent of 30,000 crore, will be fully guaranteed by the government. “This will provide liquidity support for NBFCs, HFC, MFIs and mutual funds and create confidence in the market,” Sitharaman said.

This liquidity scheme will be in addition to the 50,000 crore funding available under the RBI’s targeted long term repo operations (TLTRO 2.0). Under the TLTRO 2.0 window, banks can access three-year funding from the RBI to invest in investment-grade papers of NBFCs, with at least 50% in small- and mid-sized NBFCs and MFIs.

Within this, 10% will be invested in securities issued by MFIs, 15% in securities issued by NBFCs with assets of 500 crore and below, and another 25% in securities issued by NBFCs with assets of 500-5,000 crore.

Incidentally, investment-grade debt papers include even securities with low credit rating, but have not been considered junk.

The central bank has also provided a special liquidity facility worth 50,000 crore for mutual funds to ease their liquidity pressures. This facility was made available after MFs faced redemption pressure following the shutdown of debt schemes by Franklin Templeton.

Sitharaman also said the government will extend the partial credit guarantee scheme to cover primary market issuance of bonds by NBFCs, HFCs and MFIs with low credit rating. The idea is to provide liquidity support to even institutions with low credit rating to enable them to continue lending to MSMEs.

The PCG scheme allows public sector banks to purchase high-rated pooled assets from financially sound NBFCs and HFCs.

This will now be extended to cover papers with ratings of AA and below, including unrated papers, which will help MFIs access fresh liquidity support. The government will provide 20% first loss sovereign guarantee to public sector banks, resulting in total liquidity infusion worth  45,000 crore to the system, the FM said.

The Centre had first proposed a one-time partial credit guarantee scheme to public sector banks in the 2019 budget. This covered the first loss of up to 10% for purchase of pooled assets of crisis-hit NBFCs, amounting to 1 trillion.

“Liquidity measures and partial credit guarantee scheme 2.0, amounting to a total of 75,000 crore, will infuse more money in the financial system and, thereby, benefit the NBFCs in a big way. This was a much needed impetus needed to push the economy forward,” said Rajosik Banerjee, partner and head, financial risk management, KPMG in India.

Meanwhile, banks are awaiting the details of these measures.

“It is still unclear what will be the criteria used by the government to provide guarantee to these companies. Also, to what extent each bank will participate in the liquidity scheme,” Banerjee added.


News Source: Livemint


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