Cabinet approves guarantee scheme for PSU bank purchase of NBFC assets

The union cabinet today gave its approval for the `Partial Credit Guarantee Scheme’ for purchase of high-rated pooled assets from financially sound NBFCs/HFCs by public sector banks.

Under the `Partial Credit Guarantee Scheme’, approved by the cabinet at its meeting chaired by Prime Minister Narendra Modi, state-run banks will be offered partial guarantee by the central government for purchasing high-rated pooled assets from financially sound non-banking finance companies (NBFCs) / housing finance companies (HFCs).
The amount of overall guarantee will be limited to first loss of up to 10 per cent of fair value of assets being purchased by the banks under the scheme, or Rs10,000 crore, whichever is lower, as agreed by the Department of Economic Affairs (DEA). 
The scheme would cover NBFCs/HFCs that may have slipped into SMA-0 category during the one year period prior to 1 August 2018, and asset pools rated `BBB+’ or higher.
The window for one-time partial credit guarantee offered by Gol will remain open till 30 June 2020 or till such date by which Rs1,00,000 crore assets get purchased by the banks, whichever is earlier. The finance minister has been empowered to extend the validity of the scheme by up to three months taking into account its progress.
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 Budget 2019-20, had made a provision for purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs1,00,000 crore during the current financial year. The centre will provide one time six months' partial credit guarantee to public sector banks for first loss up to 10 per cent.
To make NBFCs / MFCs that may have slipped to SMA-0 category during the one year period prior to 1.8.2018 (i.e. prior to the IL&FS crisis), eligible for purchase of pooled assets from them by PSBs. NBFCs / HFCs reported under SMA-I and SMA-2 category during the aforesaid period will continue to be ineligible under the Scheme.
The scheme is offered to public sector banks with the objective that the government-supported purchase of pooled assets will help 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. 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.