Govt, RBI start work on new mechanism for financing NBFCs

The government is considering setting up a special purpose vehicle (SPV) for financing of non-banking finance companies (NBFCs) following the reluctance of banks and mutual funds to make available funds for the sector.

During a recent meeting of the high-level co-ordination committee on capital markets (HLCC), the proposal was discussed as an alternate mechanism for financing NBFCs, primarily those that may pose systemic risks .The scheme is similar to the commercial paper (CP) rediscounting mechanism of the US Federal Reserve.

Sources close to the development said that RBI is currently working out the modalities. They added the NBFCs with systemic risks are mostly those which are promoted by large corporate houses and those that have diversified interests across sectors. Domestic resources have become critical for such companies as overseas funding is not only expensive but also scarce.

The proposed move follows reluctance of banks and mutual funds to roll over CPs issued by the NBFCs, fearing default in recovery of dues. Once the move goes through, NBFCs will issue fresh CPs at the prevailing market rate of interest and pledge them with the proposed SPV.
 

HELPING HAND

* The government is considering the move following the reluctance of banks and mutual funds to make available funds for the sector

* The scheme is similar to the commercial paper rediscounting mechanism of the US Federal Reserve

* The proposed move follows reluctance of banks and mutual funds to roll over CPs issued by NBFCs, fearing default in recovery of dues

* Commercial papers are floated by companies and NBFCs to raise short-term funds up to one year

The SPV, which will get direct financing from RBI, can lend to the finance companies. The SPV in turn will pledge the CPs, as collateral, with RBI. The regulator for banks and NBFCs, will settle the accounts once the money is paid back by the finance companies to the SPV and it gets its dues.

Commercial papers are floated by companies and NBFCs to raise short-term funds for up to one year. On maturity, these papers are usually rolled over by banks and MFs at the prevailing interest rate. The economic slowdown and the fear of defaults have increased the perceived risk for the NBFCs, which are finding it tough to access capital.

Earlier, the repo facility opened by the RBI for banks to on-lend to NBFCs failed to take off. This financing facility is available if banks use government securities as collateral.

The proposed mechanism will not directly impact the fiscal deficit or hurt government spending since RBI may print money directly to fund the SPV. The move has, however, been debated internally since it will increase reserve money and money supply. Those opposed to the move have argued that higher money supply may fuel inflation, especially if global crude oil prices or commodity prices shoot up.