Govt okays partial credit guarantee scheme for PSBs to buy high rated assets of NBFCs/HFCs

The Union Cabinet on Wednesday approved a partial credit guarantee scheme for public sector banks (PSBs) to purchase high-rated pooled assets from financially sound NBFCs and housing finance companies.

PSBs can purchase high-rated pooled assets from financially sound Non-Banking Financial Companies (NBFCs)/Housing Finance Companies (HFCs), with the amount of overall guarantee provided by government till the first loss of up to 10 per cent of fair value of assets being purchased by banks or Rs 10,000 crore, whichever is lower.

Finance Minister Nirmala Sitharaman in the Budget speech for 2019-20 had announced that the government will provide one-time six months' partial credit guarantee to PSBs for first loss of up to 10 per cent for purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 lakh crore during the current financial year.

The scheme was announced to address temporary liquidity/cash flow mismatch issues of otherwise solvent NBFCs/HFCs without them having to resort to distress sale of their assets for meeting their commitments.

The scheme would cover NBFCs/HFCs that may have slipped into SMA-0 category during the one year period prior to August 1, 2018, and asset pools rated "BBB+" or higher.

SMA-0 accounts are the special mention accounts (SMA) against which the principal or interest or any other amount wholly or partially is overdue between 1-30 days.

"The window for one-time partial credit guarantee offered by government will remain open till 30th June, 2020 or till such date by which Rs 1,00,000 crore assets get purchased by the banks, whichever is earlier," said an official statement.

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, it said.

The release said that 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.

"This will provide liquidity to the NBFC/HFC concerned for financing the credit demand of the economy, and also protect the financial system of the country from any adverse contagion effect that may arise due to the failure of such NBFCs/HFCs," it added.