Finance Ministry Releases FAQs On Partial Credit Guarantee Scheme
The North Block of the Central Secretariat building, which houses the Ministries of Finance and Home Affairs, stands in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Finance Ministry Releases FAQs On Partial Credit Guarantee Scheme

India eased norms of the partial credit guarantee scheme and extended its timeline as it aims to address liquidity issues of non-bank lenders and secure them from future defaults amid the disruptions caused by the new coronavirus pandemic.

“The extended scheme addresses temporary liquidity or cash flow mismatches of otherwise solvent NBFCs/HFCs/MFIs without having to resort to distress sale of their assets for meeting their commitments and to enable availability of additional liquidity to them for on-lending,” said a government statement outlining the frequently asked questions.

The scheme—that allows state-run banks to purchase pooled assets from non-bank financial companies—was first introduced in the Union Budget for 2019-20. It was amended in December to accommodate low-rated NBFCs. Last week, the finance minister approved its extension with an additional credit guarantee facility relating to short-term NBFC and HFC debt papers.

What remains?

A one-time partial credit guarantee to state-run banks for first loss of up to 10 percent or Rs 10,000 crore on pooled assets purchased from NBFCs or housing finance companies and microfinance institutions. The guarantee would be provided for a total amount of Rs 1 lakh crore worth of pooled loan assets.

What’s new?

A one-time partial credit guarantee of up to 20 percent for up to Rs 45,000-crore bonds and commercial papers of non-bank lenders purchased by state-owned banks.

Loan pool assets between Rs 8,000 crore and Rs 10,000 crore have been invoked in the first phase of the scheme, according to a structured finance banker. That means the government has paid guarantees of around Rs 1,000 crore. With new loan assets qualifying under the scheme, it will benefit many NBFCs but banks would prefer to buy only short-term loan pool assets since the scheme is valid only for 24 months, the banker told BloombergQuint on the condition of anonymity.

What’s the validity period?

  • The scheme has been extended till March 31, 2021 from June 30, 2020.
  • The government guarantee will be valid for 24 months from the date of purchase of the loan pool assets and shall cease earlier if the purchasing bank sells the assets to the originating NBFC, HFC or any other entity.
  • Purchase of bonds and CPs: the scheme will be co-terminus with the tenure of the instrument.

Which non-bank lenders will be eligible?

  • NBFCs and HFCs should have been regular or in the Special Mention Account-0 category during the last one year prior to August 2018.
  • Entities reported under SMA-1 category for technical reasons alone by any bank for their borrowings during the last one year prior to August 2018 are also eligible.
  • NBFCs and HFCs under the SMA-2 or non-performing asset category are not eligible.
  • NBFCs and HFCs should not have a net NPA ratio of more than 6 percent as on March 31, 2019.
  • The entities should have made a net profit in at least one of the last three financial years.
  • The capital adequacy ratio of the NBFCs and HFCs should not be below 15 percent and 12 percent, respectively, as on March 31, 2019.
  • Government-owned NBFCs and HFCs will not qualify.

What’s the rating and origination requirement?

  • For loan pool assets, NBFCs and HFCs should have a minimum rating of ‘BBB+’ or equivalent.
  • Loan assets originated up to at least six months prior to the date of initial pool rating, provided they have a repayment history of at least six months, excluding any moratorium period.
  • Earlier, only loan assets originated before March 31, 2019 qualified.
  • For bonds and CPs, NBFCs, HFCs and MFIs should have a rating of AA and below.
  • Only primary market bonds and CP issuances purchased by state-run banks are eligible and they should have a tenor of nine to 18 months.
  • Unrated debt papers with original maturity of 9-12 months also qualify.

What’s the criteria for bond and CP purchases?

  • Total primary issuance by a single NBFC, HFC and MFI is capped at 1.25 times of the lenders’ total maturing liability over six months from the date of issuance.
  • Individual state-run banks can buy up to 20 percent of their total non-statutory liquidty ratio bond holdings.
  • The ‘AA’ and ‘AA-’ rated investment sub-portfolio should not exceed 25 percent of the total bonds and CPs purchased by the banks under the scheme.
  • Banks have to build up the portfolio of bonds and CPs within three months of the scheme announcement.
  • At the end of the period, the portfolio will be crystalised based on actual amount disbursed.
  • The bonds and CPs bought by banks are non-tradable and have to be held-to-maturity.
  • Details of the debt paper portfolio bought by banks will have to be submitted to the Small Industries Development Bank of India for verification.

When can banks invoke the guarantee?

  • For pooled loan assets, the purchasing bank can invoke the guarantee if the interest or principal installment remains overdue for a period of more than 90 days.
  • For bond and CPs purchases, banks can invoke the guarantee in case of default in servicing the instrument on its attaining maturity.
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