The Union Cabinet has approved liquidity support for non-banking finance companies (NBFCs) through a subsidiary of Industrial Development Bank of India (IDBI). Home Minister P Chidambaram told reporters on Friday that the Reserve Bank of India would provide the facility to the IDBI arm, which in turn would lend money to the cash-strapped NBFCs. The liquidity facility would be worth Rs 20,000 crore-25,000 crore and would be used by the NBFCs only to repay existing liabilities.
The liquidity facility was part of the second stimulus package announced by the government on January 2 to spur economic activity, which has been impacted by the global financial turmoil. The 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 the NBFCs that are lending to critical sectors of the economy.
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 the funds would be used by the SPV to acquire only investment-grade commercial paper and non-convertible debentures of NBFCs. The RBI will issue guidelines for pricing and lending in consultation with the Department of Financial Services. The move is likely to take care of the liquidity needs of the NBFCs for the next six months.