In order to tackle this current situation, a moratorium on loans was introduced by the Government of India. This in turn had an impact on the liquidity of banks and financial institutions. In order to help banks improve liquidity position, RBI has decreased the SLR but in the case of NBFC’s and Housing Finance Companies, there is no proper solution to tackle the problem of liquidity. So the Government of India has launched a scheme to improve the same by providing a special purpose vehicle to those sectors.
Special purpose vehicle refers to the entity created as a subsidiary by the organization to isolate the financial risk faced by it. The legal status of such entities will be secure even when the parent company goes bankrupt. The RBI through its notification dated July 1, 2020, has announced the special liquidity scheme to NBFC’S and Housing Finance Companies wherein it has allowed such entities to establish special purpose vehicle. However, those entities should fulfill the following criteria :
• NBFC’s including microfinance institutions should be registered with RBI under the Reserve Bank of India Act 1934. However, it excludes the entities registered as Core Investment Companies.
• Housing Finance Companies should be registered under the National Housing Bank Act 1987.
• Capital to Risk Assets Ratio and Capital Adequacy Ratio of NBFC’s and Housing Finance Companies should not be less than 12% to 15% as of March 31, 2019.
• Net non-performing assets of such entities should not be more than 6% as of March 31, 2019.
• These entities should have made a net profit in at least one of the last two preceding financial years(i.e.2017-18 and 2018-19).
• Those entities should not be reported under the SMA-1 or SMA-2 category by any bank for their borrowings during last one year prior to August 1, 2018.
• They should have a good rating for investment by a SEBI registered agency.
• They should comply with the requirement of special purpose vehicle for an appropriate level of collateral from the entity, which, however, would be optional and decided by SPV.
Further, the RBI also stated in its notification that SBICAP which is the special purpose vehicle of State Bank of India should purchase short-term instruments from the eligible NBFC’s and Housing Finance Companies such as Commercial Papers and Non-convertible debentures having a maturity period of not more than 3 months. It also stated that eligible entities should use such funds only to meet its financial liabilities.
The special liquidity scheme launched by the Government of India for NBFC’s and Housing Finance Companies is indeed a necessity for these entities since their liquidity position got affected due to loan moratorium.