Self-reliant package: The government will provide support to NBFCs for only three months

The government will use the Reserve Bank's money for only three months to support non-banking finance companies (NBFCs). There was hope in the NBFCs that the government would provide long-term support, although this expectation does not seem to be materializing at present, according to a government statement.

The government plans to support bonds with a term of three months only. The government will also provide a one-year guarantee for commercial papers. It may be mentioned here that Finance Minister Nirmala Sitaram announced last week to provide support to the NBFC of the country which is experiencing financial crisis.

The NBFC industry had been expecting funds for the long term so that it would not face an asset-liability mismatch but it would be time to get the money back for three months and raise money again to pay it off, which would not prove practical, said an NBFC MD. 

According to a statement issued by the Press Information Bureau, there will be no direct purchase of bonds as announced by the government but it is a guarantee type scheme. A special purpose vehicle will be set up by a large public sector bank in which the government will invest Rs 5 crore in equity.

This Special Purpose Vehicle will operate a Stressed Asset Fund which will issue interest-bearing special securities to the Reserve Bank by the Government.

The proceeds of the fund will be used to purchase bonds of NBFCs and housing finance companies maturing in three months. As long as the guarantee provided by the government is not utilized, there will be no direct financial responsibility on the government, an expert said.

Government liability The amount of default will be sufficient or the limit of guarantee will be sufficient. The guarantee limit is set at Rs 30,000 crore.