NBFCs, HFCs rated up to BBB+ come under partial credit guarantee scheme

The Union Cabinet on Wednesday approved a partial credit guarantee scheme for non-banking financial companies (NBFCs) and housing finance companies (HFCs). This will allow public sector banks (PSBs) to buy pooled assets from financially sound entities.
 
“The window for one-time partial credit guarantee offered by the GoI (Government of India) will remain open till 30 June, 2020, or till such date by which Rs 1 trillion assets get purchased by the banks, whichever is earlier,” said the government in a statement issued after the meeting.
 
It added, “Power has been delegated to the finance minister to extend the validity of the scheme by up to three months, taking into account its progress.”
 
Rohit Poddar, joint secretary, National Real Estate Development Council (Naredco), Maharashtra, welcomed the move. He said this scheme, along with a 135 basis point rate cut by the Reserve Bank of India (RBI), will catalyse cash flow into NBFCs. “This will enable HFCs to create credit and resolve the tight liquidity condition that the real estate sector has been facing,” he added. Such a scheme was first announced in the Budget, but only for NBFCs rated up to AA. However, AA-rated companies were anyway able to raise money from the market considering their healthy credit rating. Hence, the government’s guarantee was largely immaterial.
 
The Cabinet therefore modified the scheme to include purchase of papers issued by NBFCs and HFCs rated up to BBB+. Most stressed NBFCs fall under this category, while some have already slipped into D category after recent default.
 

To include even those companies, the government said banks can now purchase papers of even those NBFCs and HFCs provided they have been only in the SMA-0 category before August 1, 2018, or before the IL&FS crisis started.
 
Special Mention Account (SMA)-0 means accounts in which principal or interest payment is not overdue for more than 30 days but account showing signs of incipient stress.
 
Anything more than this is SMA-2 and SMA-3. The Cabinet nod leaves out those companies who were into SMA-1 and SMA-3 even before the IL&FS crisis started.

The government’s partial credit guarantee scheme covers bonds of up to Rs 1 trillion, with the amount of overall guarantee being limited to first loss of up to 10 per cent of fair value of assets being purchased by the banks under the Scheme, or Rs 10,000 crore, whichever is lower.
 
“The proposed government guarantee support and resultant pool buyouts will help address 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,” the Union government said in its statement.
 
The scheme was first launched in August, in which the government said it will provide one time six months' partial credit guarantee to public sector banks for first loss up to 10 per cent.

Other decisions

Fund infusion in IIFCL

To fund big-ticket infrastructure projects, the government will infuse additional equity worth Rs 5,300 crore in FY20 and Rs 10,000 crore in the FY21 in India Infrastructure Finance Company Limited (IIFCL). According to the decision approved by the Cabinet, the government will give budgetary support to IIFCL or/and issue recapitalisation bonds. The timing, terms and conditions will be decided by the department of economic affairs in the finance ministry.

Increase in authorised capital of IIFCL 

The Cabinet also approved an increase in the authorised capital of IIFCL from Rs 6,000 crore to Rs 25,000 crore. The Cabinet decision will enable IIFCL to create requisite headroom for borrowing, enabling it to finance big ticket infrastructure projects in line with Government's target to invest Rs 1 trillion in this sector over the next five years.

Nod to signing of MoU between New Delhi & Tokyo

n Ahead of the visit of Japan's Prime Minister Shinzo Abe to India later this week, the Cabinet gave nod to signing of the memorandum of cooperation (MoC) between New Delhi and Tokyo to strengthen cooperation in steel sector. Also approved signing of a memorandum of understanding between Central Electricity Authority and Japan Coal Energy Centre for cooperation in low carbon supply of electricity.

Aircraft Act amendments approved

Cabinet approves amendments to the Aircraft Act, 1934 for enhancing the cap on fine from the existing Rs 10 lakh to Rs one crore. It also enlarges the scope of the existing Act to include regulation of all areas of Air Navigation.