The pandemic has crippled the economy and affected all sectors globally. India has come up with a special purpose vehicle(SPV), with fully-guaranteed support to assist stressed shadow lenders in these times of hardships. Shadow banking institutions are innovators in the financial market. They manage to lend finances without facing the usual rules and regulatory oversights regarding liquidity and capital reserves that are required to be maintained by traditional lenders to prevent financial crisis and bank failures.
An SPV would be set up to manage Stressed Asset Fund (SAF), issuing securities that are guaranteed by the government of India and purchased only by the RBI, as the law does not direct infusion of funds. The proceed from this investment made RBI would be invested as a short-term (maturity of 3 months) debt of NBFC. This scheme would be beneficial for the NBFCs to get a better rating for bonds and boost the flow of funds from the non-banking sector. SPVs operations are capped within the Rs 3000 crore limit, as announced by the Union government Covid19 relief package. The government has decided to infuse Rs 5 crore into the SPV as a direct implication, carrying a liability equal to the amount of default subject to the guarantee ceiling.
Partial credit guarantee scheme 2.0 (PCGS)
A revised scheme of worth Rs 45000 crore was announced as a measure to support NBFCs and MFIs. The union cabinet has extended the purchase of pooled assets of distressed entities. State-owned banks will be provided with a sovereign guarantee of up to 20% of first loss for the purchase of bonds or commercial papers of MFIs, NBFCs, HFCs that have a credit rating of AA or below, whereas the existing scheme only provides 10% of the first loss against just pooled assets earlier. Mortgaged lenders reported as SMA 1 are also eligible for this scheme, earlier SMA 1 and SMA 2 were not considered eligible.
Guaranteed emergency credit line for MSMEs (GECL)
The union cabinet has sanctioned an additional Rs 3 lakh crore for MSMEs and mudra borrowers through GECL with interest rates capped at 9.25% for banks and financial institutions, and 14% for NBFCs. As announced by SIDBI, this fully guaranteed and collateral-free scheme will be provided by National Credit Guarantee Trust Company Ltd (NCGTC) and an SPV will be set up to operate the same with an initial corpus of Rs 15500 crore. MSMEs can get additional working capital loans and term loans up to 20% of their outstanding credit, up to Rs 25 crore and the term loans will be for 4 years with a 12-month moratorium on the principal amount.
SPV approved, support to shadow lenders, MSMEs