Govt eases norms of partial credit guarantee scheme to help NBFCs, HFCs

The Cabinet on Wednesday relaxed the norms of the Partial Credit Guarantee Scheme and extended its time period in order to widen the coverage to include a larger number of NBFCs, HFCs and micro finance institutions.

As part of the Rs 21 lakh crore special economic package amid the COVID-19 crisis, Finance Minister Nirmala Sitharaman last week announced Partial Credit Guarantee Scheme (PCGS) 2.0 worth Rs 45,000 crore for non banking financial companies (NBFCs) and micro finance institutions (MFIs).

Under the modified PCGS, sovereign guarantee of up to 20 per cent of first loss will be provided to state-owned banks for purchase of bonds or commercial papers of NBFCs, MFIs and housing finance companies (HFCs) having a credit rating of AA or below, including unrated paper with original maturity of up to one year.

The Cabinet has also extended the time period of the scheme from June 30, 2020 to March 31, 2021 for purchase of pooled assets of the distressed entities.

The Union Cabinet, chaired by Prime Minister Narendra Modi, has approved the Sovereign portfolio guarantee of up to 20 per cent of first loss for purchase of Bonds or Commercial Papers with a rating of AA and below (including unrated paper with original/ initial maturity of up to one year) issued by NBFCs/HFCs/MFIs by public sector banks through an extension of PCGS," said an official release.

As per the modification, NBFCs/HFCs which have reported under Special Mention Account (SMA-1) category on technical reasons alone during the last one year period prior to August 1, 2018 will be eligible for benefit under the scheme.

Earlier NBFCs/HFCs reported as SMA-1 or SMA-2 during the specified period were ineligible.

The SMA-1 refers to those accounts where the principal or interest payment remains overdue between 31-60 days, while SMA-2 pertains to those where the overdue period is between 61-90 days.

The government has also relaxed the net profit criteria under the scheme. Henceforth the entities which have made net profit in at least one of the three financial years of 2017-8, 2018-19 and 2019-20 will be eligible. Earlier, entities which made a net profit in 2017-18 or 2018-19 were only eligible.

The existing PCGS, it may be mentioned, was issued on December 11, 2019 offering sovereign guarantee of up to 10 per cent of first loss to PSBs for purchasing pooled assets rated BBB+ or above up to Rs 1 lakh crore, from financially sound NBFCs.

The outbreak of COVID-19 along with lockdown of business activity has now necessitated adoption of additional measures to support NBFCs and HFCs, said the release, adding the modifications will enable wider coverage of the scheme.

Since NBFCs, HFCs and MFIs play a crucial role in sustaining consumption demand as well as capital formation in small and medium segment, it is essential that they continue to get funding without disruption, and the extended PCGS is expected to systematically enable the same, it added.

The release said the lockdown restrictions are likely to have a negative impact on both collections and fresh loan disbursements, besides a deleterious effect on the overall economy.

This is anticipated to result not only in asset quality issues for the NBFC/ HFC/ MFI sector, but also low loan growth as well as higher borrowing costs for the sector, with a cascading effect on Micro, Small and Medium Enterprises (MSMEs) which borrow from them, it said.

"While the RBI moratorium provides some relief on the assets side, it is on the liabilities side that the sector is likely to face increasing challenges. The extension of the existing scheme will address the liability side concerns," it said.

In addition, modifications in the existing PCGS will enable wider coverage of the scheme on the asset side also.

Since NBFCs, HFCs and MFIs play a crucial role in sustaining consumption demand as well as capital formation in small and medium segment, it is essential that they continue to get funding without disruption, and the extended PCGS is expected to systematically enable the same, the release added.