Weaker NBFCs to gain from partial credit guarantee scheme 2.0 – The Financial Express

The decisions will help NBFCs, hit hard by the Covid-19 crisis, tackle their temporary liquidity mismatch and also enable them to continue to lend and aid last-mile financing.

The SPV will manage a stressed asset fund (SAF) whose special securities would be guaranteed by the government and purchased by the Reserve Bank of India (RBI) only.

The Cabinet on Wednesday approved the proposed partial credit guarantee scheme (PCGS) 2.0 worth Rs 45,000 crore to improve liquidity for low-rated shadow lenders, and eased certain criteria for the pooled purchase of NBFC assets by state-run banks under the existing PCGS 1.0. The Cabinet also approved a special liquidity scheme worth Rs 30,000 crore, under which the Reserve Bank of India will indirectly purchase debt sold by non-banking financial companies (NBFCs), housing finance companies (HFCs) and micro-finance institutions (MFIs), a senior government official said. A large state-run bank will set up a special purpose vehicle (SPV) to manage a stressed asset fund, which will raise money by issuing securities worth Rs 30,000 crore guaranteed by the government. These securities will be purchased only by the central bank. The government will contribute Rs five crore towards the equity of the SPV.

“Beyond that (Rs 5 crore towards SPV equity), there is no financial implication for the government until the guarantee involved is invoked. However, on invocation, the extent of government liability would be equal to the amount of default subject to the guarantee ceiling. The ceiling of aggregate guarantee has been set at Rs 30,000 crore, to be extended by the amount required as per the need,” according to an official statement.

The SPV will manage a stressed asset fund (SAF) whose special securities would be guaranteed by the government and purchased by the Reserve Bank of India (RBI) only. The proceeds of sale of such securities would be used by the SPV to acquire short-term debt of NBFCs/HFCs. The scheme will be administered by the department of financial services.

The decisions will help NBFCs, hit hard by the Covid-19 crisis, tackle their temporary liquidity mismatch and also enable them to continue to lend and aid last-mile financing. The risk aversion of investors to low-rated NBFC and MFI firms has only intensified in recent months, which was reflected in the fact that banks only accepted half the money provided by the central bank under the first tranche of the targeted long term repo operations 2.0.

As for the PCGS 2.0, which was part of the packages announced by finance minister Nirmala Sitharaman last week, the existing PCGS will be extended to cover borrowings, such as primary issuance of bonds/commercial papers of such firms, wherein the government will bear the first 20% of loss. The government said AA-rated papers and below, including unrated papers, will be eligible for investment. It will cover NFBCs, HFCs and MFIs.

The government has now extended the validity of the extant scheme (PCGS 1.0) by nine months through March 2021. It also relaxed conditions to make those NBFCs, which were reported under the SMA-1 category merely on technical reasons one year before August 2018, eligible to tap this scheme. Earlier NBFCs/HFCs reported as SMA-1 or SMA-2 during this period were ineligible. Similarly, NBFCs, which made profits in at least one of the past three financial years (and not two years), will be eligible to be covered under the PCGS 1.0.

The Cabinet also cleared a proposal for the government to offer full guarantee to banks to provide Rs 3 lakh crore as automatic collateral-free loans to micro, small and medium enterprises (MSMEs) whose accounts are still standard, in sync with the announcement last week. For this purpose, the government has earmarked a corpus of Rs 41,600 crore over the current and the next three financial years, it said in a statement after the Cabinet meeting. Borrowers under the Mudra scheme, which promotes aspiring entrepreneurs, will also be covered under this plan.

“Under the scheme, 100% guarantee coverage to be provided by National Credit Guarantee Trustee Company for additional funding of up to Rs three lakh crore to eligible MSMEs and interested Mudra borrowers, in the form of a Guaranteed Emergency Credit Line facility,” according to the statement.

The government will provide emergency credit line to MSMEs from banks and NBFCs up to 20% of their entire outstanding credit as of February 29. Borrowers with up to Rs 25 crore outstanding and Rs 100 crore annual turnover will be eligible. Such loans will have a 4-year tenor with moratorium of 12 months on the repayment of the principal amount. The interest will be capped and the scheme can be availed until October 31.

via Weaker NBFCs to gain from partial credit guarantee scheme 2.0 – The Financial Express

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