IDBI Bank, SIDBI to float SPV for funding NBFCs

Relief could soon be on way for fund-starved non-banking finance companies (NBFCs). The government will soon designate IDBI Bank or specialised small-scale lender SIDBI to float a special purpose vehicle (SPV) to subscribe to investment-grade paper of NBFCs, in a move aimed at addressing fund woes of these entities. As per the mechanism, the SPV will float bonds worth Rs 25,000 crore, which would be subscribed to by RBI. These funds would then be used by the SPV to buy investment-grade paper from NBFCs, a government official who did not wish to be identified said. The mechanism will be announced shortly, the official said. The government had, on January 2, announced that an SPV will be designated shortly to provide liquidity support to NBFCs against their investment-grade paper as a part of the second stimulus package. The government and RBI have already announced some measures including access to overseas funds to address the funding problems of NBFCs, a sector which was hit badly by the global financial meltdown. The traditional sources of funding of the NBFCs have been banks, money markets and inter-corporate deposits. While banks were providing funds through term-loans and cash credit lines, NBFCs were also raising funds from money market players – mutual funds, insurance companies and short term investors such as corporates – through commercial papers (CPs) and debentures. CPs are short-term instruments through which issuers raise funds and is usually rolled over on every maturity date to sustain the flow of short-term credit. However, most of these sources have dried up now following the outbreak of the financial crisis in the western world. NBFCs are finding it difficult to raise money both from banks and mutual funds. However, the access to the SPV funds would be available only to NBFCs which can issue investment-grade paper. Usually debt instruments with a BBB rating, for instance, would qualify as investment grade. However, the SPV is likely to lay down what constitutes investment grade. NBFCs are financial institutions akin to banks on the lending side, but they differ considerably on the borrowing side as they cannot offer savings or current accounts or issue cheque books to their depositors.