New Delhi: In pursuance of the announcement made in the Union Budget 2019-20, presented by the Union Minister of Finance and Corporate Affairs Smt. Nirmala Sitharaman, the Government has issued a scheme regarding partial credit guarantee on 10.8.2019. The Scheme would enable the public sector banks (PSBs) to purchase pooled assets of financially sound NBFCs amounting to Rs. one lakh crore. It is expected that this measure would provide liquidity to the NBFC Sector and, in turn, enable them to continue to play their role in meeting the financing requirements of the productive sectors of the economy including MSME, retail and housing.
It may be recalled that the Union Minister of Finance & Corporate Affairs Smt. Nirmala Sitharaman in her Budget Speech for the Union Budget 2019-20 had made the following announcement to support fundamentally sound Non-Banking Financial Companies (NBFCs) in getting continued funding from banks:
“For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rupees One lakh crore during the current financial year, Government will provide one time six months’ partial credit guarantee to Public Sector Banks for first loss of up to 10%.”
The details of the Scheme launched in this respect are as below –
Name of the Scheme: ‘Partial Credit Guarantee offered by Government of India (GoI) to Public Sector Banks (PSBs) for purchasing high-rated pooled assets from financially sound Non-Banking Financial Companies (NBFCs)/Housing Finance Companies (HFCs)’.
Objective: To address temporary asset-liability mismatches of otherwise solvent NBFCs/HFCs without having to resort to distress sale of their assets for meeting their commitments.
The validity of the scheme: The window for one-time partial credit guarantee offered by GoI will open from the date of issuance of the Scheme by the Government for a period of six months, or till such date by which Rupees One lakh crore assets get purchased by banks, whichever is earlier.
A. Operational Guidance:
(i) The assets shall be purchased by banks at fair value.
(ii) Assets to be assigned by NBFCs/HFCs must be rated by Credit Rating Agencies (CRAs) accredited by Reserve Bank of India (RBI).
(iii) The one-time guarantee provided by the GoI on the pooled assets will be valid for 24 months from the date of purchase and can be invoked on the occurrence of default as outlined under heading ‘D’ below. The guarantee shall cease earlier if the purchasing bank sells the pooled assets to the originating NBFC/HFC or any other entity, before the validity of the guarantee period.
(iv) The purchasing banks may have service level agreements with the originating NBFCs/HFCs for servicing, including administration of the individual assets.
(v) The NBFCs/HFCs can have the option to buy back their assets after a specified period of 12 months as a repurchase transaction, on a right of first refusal basis.
B. Eligible NBFCs/HFCs:
(i) The NBFCs registered with RBI under the Reserve Bank of India Act, excluding those registered as Micro Finance Institutions and Core Investment Companies.
(ii) HFCs registered with National Housing Bank (NHB) under the National Housing Bank Act.
(iii) The CRAR of NBFCs/CAR of HFCs should not be below the regulatory minimum (i.e. 15% for NBFCs and 12% for HFCs) as on 31.3.2019.
(iv) Their net Non-Performing Asset should not be more than 6% as on 31.3.2019.
(v) They should have made a net profit in at least one of the last two preceding financial years (i.e.FY 2017-18 and 2018-19).
(vi) The NBFCs/HFCs should not have been reported under SMA category by any bank for their borrowings during last one year prior to 1.8.2018.
(vii) Micro Finance Institutions and Core Investment Companies are not covered under the Scheme.
C. Eligible assets:
a) Revolving credit facilities;
b) Assets purchased from other entities; and
c) Assets with a bullet repayment of both principal and interest.
D. Invocation of Guarantee:
The purchasing bank can invoke the GoI guarantee if the interest and/or instalment of principal remains overdue for a period of more than 90 days (i.e. when liability is crystalised for the underlying borrower) during the validity of such guarantee, subject to the condition that the guarantee is for the first loss up to 10 per cent.
E. Reporting and claims:
F. Guarantee Fees:
NBFCs/HFCs will pay a fee equivalent to 0.25% per annum of the fair value of assets being purchased by the bank under this Scheme to GoI (must be routed through the purchasing bank).
G. The NBFCs/HFCs whose assets are sold under this Scheme shall undertake the following: