Cabinet clears liquidity support to NBFCs

The government on Friday set in motion the process of providing liquidity support up to Rs 25,000 crore to cash-strapped Non-Banking Finance Companies (NBFCs) to enable them to pay existing liabilities, as was announced in the second stimulus package to spur sagging economic growth.

According to the decision approved by the Cabinet here, a Stressed Asset Stabilisation Fund, set up for acquiring the stressed assets of IDBI, would function as a Special Purpose Vehicle (SPV) to provide money to non-deposit taking systemically important NBFCs.

"The SPV would issue government guaranteed securities, subject to a total amount of securities not exceeding Rs 20,000 crore with an additional Rs 5,000 crore, if needed.

"These securities would be purchased by (the) RBI and funds would be used by (the) SPV to acquire only investment grade commercial paper and non-convertible debentures of NBFCs," Home Minister P Chidambaram told reporters here.

The funds will be used by NBFCs only to repay existing liabilities, he said, adding the RBI will issue guidelines for pricing and lending in consultation with the Department of Financial Services.

The second package announced by the government on January 2 to perk up the economy had said, "An SPV will be designated shortly to provide liquidity support against investment grade paper to NBFCs."

Announcing the package, Planning Commission Deputy Chairman Montek Singh Ahluwalia said NBFCs are not directly affected by the additional liquidity provided in earlier measures.

"But now the government is setting up an SPV which will be used to channel financial support to NBFCs. The total amount could be up to Rs 25,000 crore to make sure that liquidity needs of NBFCs do not pose any problems in the next six months or so," he had said.