Sources said the SPV to be created out of SUUTI assets would inject up to 20% of the book value of any identified NBFC via preferential equity.
The government is discussing a proposal to use its residual Specified Undertaking of Unit Trust of India (SUUTI) holdings to create a facility for boosting non-banking finance companies’ (NBFCs) ability to mobilise funds, according to official sources.
As per the proposal, the government will vest 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 at least three times its value. The funds mobilised will then be used to invest in preferred equity of select cash-starved NBFCs (to be identified on the basis of certain criteria), which in turn will leverage the enhanced equity base to raise funds many time 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.
“NBFCs need the equity support (from the government) due to confidence issues faced by these firms in the market as many of them are over-leveraged,” an official told FE. The proposed SPV route wouldn’t have any direct fiscal implications, he pointed out.
Sources said the SPV to be created out of SUUTI assets would inject up to 20% of the book value of any identified NBFC via preferential equity. Holders of such equity usually have priority over common stock (ordinary shares) in the payment of dividends (fixed) and upon liquidation. The returns from such investments would cover the borrowing cost of the SPVs. Once the finances improve, the NBFCs would require to buy back the preferential equity from the SPV, the sources added.
Major SUUTI holdings are: 7.93% in ITC worth about Rs 23,095 crore, 4.97% in Axis Bank worth Rs 10,660 crore. The government also holds minor stakes in about three dozen other firms, through SUUTI. The government has taken a number of steps in recent months to salvage the ailing shadow-banking sector, recognising its importance as a key medium of credit delivery to MSMEs and other economic agents with limited access to banks and financial markets.
To address the liquidity issues faced by NBFCs, in the Budget for FY20, the government offered a one-time partial guarantee of Rs 1 lakh crore to public-sector banks for purchasing consolidated high-rated pooled assets of financially-sound NBFCs. This has covered their first loss of up to 10% and was aimed at easing the liquidity stress in the NBFC/HFC sector and increase the access of these institutions to bank finance. On Saturday, Sitharaman said after a meeting with chiefs of state-run banks that approvals were given for PSBs to purchase NBFC assets worth Rs 4,294 crore since December 11. After the IL&FS default that brought to the fore the crisis among NBFCs, assets of NBFCs rose 12.8% to close to Rs 32 lakh crore, she said, adding that some good NBFCs, including housing finance companies, are now able to raise funds from the market at rates lower than before the IL&FS crisis broke out.
Former chief economic adviser Arvind Subramanian and Josh Felman wrote in a paper recently that with growth collapsing, India was facing a ‘Four Balance Sheet’ challenge — the original two sectors of over-leveraged firms and banks, plus NBFCs and real estate companies. They said given the recent credit bubble and the series of problems, involving so many financial institutions, the time could be ripe for a second Asset Quality Review (AQR), which would allow the government and RBI to assess the precise magnitude and sectoral nature of the problem and thereby facilitate better-tailored and better-designed policies to solve it. They stressed that the AQR should cover not just the NBFCs but also the banks, which are experiencing renewed stress from the real estate, steel, power, and telecom sectors.