Cabinet approves Special Liquidity Scheme for NBFCs/HFCs

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News:Union Cabinet has approved a Special Liquidity Scheme for Non-Banking Financial Companies(NBFCs) and Housing Finance Companies(HFCs) to improve liquidity position of the NBFCs/HFCs.

Facts:

  • The Scheme will be administered by the Department of Financial Services.
  • Under the Scheme, a large public sector bank would set up a Special Purpose Vehicle(SPV) to manage a Stressed Asset Fund(SAF) whose securities would be guaranteed by the Government of India.
  • The SPV would issue securities as per requirement subject to the total amount of securities not exceeding Rs. 30,000 crore.
  • The securities issued by the SPV would be purchased by RBI only and proceeds thereof would be used by the SPV to acquire the debt of at least investment grade of short duration (residual maturity of upto 3 months) of eligible NBFCs / HFCs.

Additional Facts:

  • Non-Banking Financial Company (NBFC): It is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares issued by Government or local authority or other marketable securities.
  • However,it does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services of immovable property.
  • Further, NBFCs lend and make investments just like banks.But there are a few differences as:
    • NBFC cannot accept demand deposits;
    • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
    • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
  • Housing Finance Company(HFC): It is a company registered under the Companies Act, 1956 which primarily transacts business of providing finance for housing whether directly or indirectly.