The TARP was an initiative by the US Treasury to stabilise the financial system during the global financial crisis by buying mortgage-backed securities and investing in common shares of troubled companies.
The Centre is considering a proposal on the lines of TARP — the US’ Troubled Asset Relief Programme for the beleaguered financial sector during 2008 financial crisis — to invest in equity of ‘top twenty’ non-banking financial companies (NBFCs) to boost their lending capacity. The NBFCs to benefit from the scheme would be selected on the basis of their lending profile, a source said, without elaborating.
The government might use its residual Specified Undertaking of Unit Trust of India (SUUTI) holdings to subscribe to preferential equities of the identified NBFCs, excluding housing finance companies, according to the source.
The TARP was an initiative by the US Treasury to stabilise the financial system during the global financial crisis by buying mortgage-backed securities and investing in common shares of troubled companies. The programme ran from 2008 to 2010, investing $426.4 billion and earning back $441.7 billion.
“The idea is to infuse about `2,000 crore in each of these NBFCs via preference shares. It may be a mini-TARP to loosen the tightness in the NBFC sector credit growth,” an official said.
“The trifecta of constrained funding access with rising borrowing costs, re-calibration and de-risking of loan book and a slowing economy is set to beat down growth in assets under management (AUM) of non-banks — NBFCs and HFCs — to a decadal low of 6-8% this fiscal, compared with ~15% last fiscal,” Crisil said in a report recently. The IL&FS default, in September 2018, brought to the fore the crisis among NBFCs.
As per the proposal, reported by FE earlier, the government will invest the bulk of its SUUTI stakes — worth over Rs 33,000 crore at current market prices — with a special purpose vehicle (SPV) and leverage the asset to raise debt from market. The funds mobilised will then be used to invest in preferred equity of select NBFCs, which in turn will leverage the enhanced equity base to raise funds many times higher from the market. Though the precise details of the scheme are being worked out, sources said it could probably find place in the Budget speech of finance minister Nirmala Sitharaman.
The proposed SPV route wouldn’t have any direct fiscal implications as the body would cover its borrowing costs from earnings from preferential equities. Holders of such equity usually have priority over common stock (ordinary shares) in the payment of dividends (fixed) and upon liquidation. Once the finances improve, the NBFCs would require to buy back the preferential equity from the SPV, the sources added.