Government Expands Partial Credit Guarantee Scheme To Lower-Rated Assets
A customer counts Indian rupee banknotes at the Mayuresh Watches and Traders watch and mobile phone store in the Byculla area of Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Government Expands Partial Credit Guarantee Scheme To Lower-Rated Assets

The Indian government has approved changes to the partial credit guarantee scheme introduced in Budget 2019-20 to allow state-run banks to buy lower-rated assets from non-bank lenders.

Public sector banks will now be allowed to buy ‘BBB+’ rated assets of non-banking financial companies against the earlier rule that only ‘AA’ rated assets will get the benefit of the partial credit guarantee being offered by the government.

The scheme was announced by Finance Minister Nirmala Sitharaman in her maiden Budget speech, which was to provide a one-time six-month partial credit guarantee to state-run banks for first loss of up to 10 percent or Rs 10,000 crore, whichever is lower, on high-rated pooled assets of NBFCs. The guarantee would be provided for a total amount of Rs 1 lakh crore during the current financial year, the government had said.

Banks had suggested a tweak in the scheme to allow for purchase of lower-rated assets since NBFCs have already securitised a large chunk of higher-rated assets.

The criteria for NBFCs to avail the scheme has also been changed to cover non-bank lenders and housing finance companies which may have been overdue on their loans by up to 30 days as of August 2018.

The scheme will be open till June 30, 2020, and can be extended by another three months, the government said.

The proposed government guarantee support and resultant pool buyouts will help NBFCs/HFCs resolve their temporary liquidity or cash flow mismatch issues, and enable them to continue contributing to credit creation and providing last mile lending to borrowers, thereby spurring economic growth.
Government Statement

The changes made to the scheme will increase the pool of assets eligible for partial credit guarantee, said Raman Aggarwal, co-chairman of Finance Industry Development Council. Aggarwal said loan pools rated AA and above have already been securitised and sold to banks to a large extent.

According to data shared by the government, public sector banks had identified assets worth Rs 15,455 crore under the partial credit guarantee scheme as of October.

As the actual purchases under the scheme have been low, the government has made changes to speed up the disbursals, Aggarwal said. “We expect the money to start flowing to the NBFC sector soon with the new changes introduced.”

India’s non-bank lenders have continued to face difficulties in raising fresh funds from the market. This has constrained their growth.

NBFC loan growth may fall to a decade low of 6 to 8 percent in the current financial year compared to 15 percent last year, said Crisil Ratings in a report dated Dec.11. According to the rating agency, while NBFCs with strong parentage have continued to get fresh funds, many others have struggled.

For those that have faced difficulties in raising funds, securitisation is the most commonly used route to unlock liquidity. The partial credit guarantee offered by the government will ensure that route of fundraising remains open for stressed NBFCs.

WATCH | Key takeaways from cabinet decisions.

Other Cabinet Decisions

Other decisions approved by the cabinet include:

Changes To Insolvency Code

  • The government has approved changes to the Insolvency and Bankruptcy Code, 2016 to streamline the insolvency resolution process.
  • The successful bidders of the corporate insolvency resolution process will be “ring fenced” from criminal proceedings against offences committed by previous promoters or the management.
  • For a stressed company to continue as a going concern, licences, permits, concessions, clearances will not be terminated or suspended or not renewed during the moratorium period.
  • An additional threshold has been introduced for a group of financial creditors represented by an authorised person to prevent frivolous triggering of resolution process.

Capital For IIFCL

  • The cabinet has also approved providing additional equity support of Rs 15,300 crore to India Infrastructure Finance Company Ltd. in the ongoing and the next financial year through budgetary support or recapitalisation bonds.
  • The authorised capital of the infrastructure financing company has been increased to Rs 25,000 crore from Rs 6,000 crore earlier. “This will enable IIFCL to create requisite headroom for borrowing, thus enabling it to finance big-ticket infrastructure projects in line with Government of India’s target to invest Rs 100 lakh crore in infrastructure sector over the next five years,” the government said.

Also read: Cabinet Approves Rs 5,300 Crore Capital Infusion Into India Infrastructure Finance Company

NHAI Investment Trust

  • The government has authorised the National Highways Authority of India to set up infrastructure investment trusts.
  • This will enable NHAI to monetise completed national highways that have a toll collection track record of at least one year.

Also read: Cabinet Allows NHAI To Set Up InvIT, Monetise National Highway Projects

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