20-May-2020: Cabinet approves modifications in the existing "Partial Credit Guarantee Scheme (PCGS)"

The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has approved the Sovereign portfolio guarantee of up to 20% of first loss for purchase of Bonds or Commercial Papers (CPs) with a rating of AA and below (including unrated paper with original/ initial maturity of up to one year) issued by NBFCs/ MFCs/Micro Finance Institutions (MFIs) by Public Sector Banks (PSBs) through an extension of the Partial Credit Guarantee Scheme (PCGS).

The Cabinet also approved modifications in the existing PCGS on purchase of pooled assets, increasing its coverage by—

• Making NBFCs/HFCs reported under SMA-1 category on technical reasons alone during the last one year period prior to 1.8.2018 eligible. Earlier NBFCs/HFCs reported as SMA-1 or SMA-2 during this period were ineligible under the Scheme.
• Relaxing the net profit criteria to the extent that the concerned NBFC/HFC should now have made a profit in at least one of the financial years of FY2017-18, FY 2018-19 and 2019-20. Earlier, the NBFC/HFC should have made a net profit in at least one of the financial years of FY 2017-18 and2018-19.
• Relaxing the criteria regarding date of origination of assets to include new assets originating up to at least six months prior to the date of initial pool rating. Earlier, only assets originated up to 31.3.2019 were eligible under the Scheme.
• Extending the Scheme from 30.6.2020 to 31.3.2021 for purchase of pooled assets.

The existing PCGS was issued on 11.12.2019 offering sovereign guarantee of up to 10% of first loss to PSBs for purchasing pooled assets worth rated BBB+ or above worth up to Rs. 1,00,000 crore, from financially sound NBFCs/ MFCs. The outbreak of COVID-19 along with lockdown of business activity has now necessitated adoption of additional measures to support NBFCs and HFCs - On the liabilities side by providing a sovereign guarantee to cover purchase of Bonds/CPs issued by NBFCs/HFCs as well as MFIs which also play a critical role in extending credit to small borrowers; and on the assets side by modifying the existing PCGS to widen its coverage,

Implementation schedule: The window for this one-time partial credit guarantee offered by Gol will remain open till 31st March, 2021 for purchase of pooled assets and for the period as specified under the Scheme for purchase of Bonds/CPs, or till such date by which Rs. 10,000 crore worth of guarantees, including both guarantees toward purchase of pooled assets and Bonds/ CPs, are provided by the Government, whichever is earlier.

Impact: COVID-19 crisis and consequent 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. 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. 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.

11-Dec-2019: Cabinet approves "Partial Credit Guarantee Scheme" for purchase of high-rated pooled assets from financially sound NBFCs/HFCs by PSBs

The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has given its approval to the following:

1. "Partial Credit Guarantee Scheme", to be offered by the Government of India (Gol) to Public Sector Banks (PSBs) for purchasing high-rated pooled assets from financially sound Non-Banking Financial Companies (NBFCs) / Housing Finance Companies (HFCs), with the amount of overall guarantee being limited to first loss of up to 10 per cent of fair value of assets being purchased by the banks under the Scheme, or Rs. 10,000 crore, whichever is lower, as agreed by 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 1.8.2018, and asset pools rated "BBB+" or higher.
2. The window for one-time partial credit guarantee offered by Gol 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. 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.

Major Impact: 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.

Background:

In the Union Budget 2019-20, it was announced that:

"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 up to 10%."

In pursuance to the aforesaid Budget announcement, a Scheme was issued on 10.8.2019 (as modified on 23.9.2019) for providing Government Guarantee to PSBs for purchase of assets by them from NBFCs / HFCs, limited to 10 per cent of fair value of assets purchased by the banks under the Scheme or Rs.10,000 crore, whichever is lower. The window was for a period of six months from the date of issuance of the Scheme or till such date by which Rs.1,00,000 crore of assets get purchased by the Banks, whichever is earlier.

Based upon suggestions received from various stakeholders and discussions held with them, it was decided to obtain approval of the Cabinet on the Scheme incorporating modifications as under:

1. 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.
2. To revise the minimum rating of the underlying asset pool being purchased by PSBs from the existing "AA" to "BBB+".
3. To make the Scheme effective upto 30.6.2020, with powers being delegated to the Finance Minister to further extend the Scheme by 3 more months, depending upon the progress made under the Scheme.

The Cabinet has now accordingly approved the "Partial Credit Guarantee Scheme", incorporating modifications as above.

The Scheme is offered to Public Sector Banks with the objective that the purchase of pooled assets enabled by Government guarantee support under the Scheme, will help addressing 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.

13-Aug-2019: Government issues Scheme to provide a one-time partial credit guarantee to PSBs for purchase of pooled assets of financially sound NBFCs.

In pursuance of the announcement made in the Union Budget 2019-20, 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 economy including MSME, retail and housing.

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%.

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.

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.

Operational Guidance:

1. The assets shall be purchased by banks at fair value.
2. Assets to be assigned by NBFCs/HFCs must be rated by Credit Rating Agencies (CRAs) accredited by Reserve Bank of India (RBI).
3. 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 'Invocation of Guarantee' 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.
4. The purchasing banks may have service level agreements with the originating NBFCs/HFCs for servicing, including administration of the individual assets.
5. 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.

Eligible NBFCs/HFCs:

1. The NBFCs registered with RBI under the Reserve Bank of India Act, excluding those registered as Micro Finance Institutions and Core Investment Companies.
2. HFCs registered with National Housing Bank (NHB) under the National Housing Bank Act.
3. 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.
4. Their net Non-Performing Asset should not be more than 6% as on 31.3.2019.
5. 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).
6. 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.
7. Micro Finance Institutions and Core Investment Companies are not covered under the Scheme.

Eligible assets:

1. Assets originated up to 31.3.2019 will only be eligible under this scheme.
2. Assets should be standard in the books of NBFCs/HFCs on the date of sale.
3. The pool of assets should have minimum rating of 'AA' or equivalent at fair value prior to the partial credit guarantee by GoI.
4. Each account under the pooled assets should have been fully disbursed and security charge should have been created in favour of the originating NBFCs/ HFCs.
5. NBFCs/HFCs can sell up to a maximum of 20% of their standard assets as on 31.3.2019 subject to a cap of Rs. 5,000 crore at fair value. Any additional amount above the cap of Rs. 5,000 crore will be considered on pro rata basis, subject to availability of headroom.
6. The underlying assets should represent the debt obligations of a homogeneous pool of obligors and individual asset size in the pool is capped at Rs. 5 crore (i.e. asset pool should be sufficiently granular).
7. Originating NBFCs/HFCs cannot assign the following assets under this Scheme:
   1. Revolving credit facilities;
   2. Assets purchased from other entities; and
   3. Assets with bullet repayment of both principal and interest.

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 crystalized 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.

Reporting and claims:

1. There should be a process of real time reporting of such transactions by the banks to GoI and to get the information on remaining available headroom for purchase of such pooled assets. The Department of Financial Services (DFS), Ministry of Finance would obtain the requisite information in a prescribed format from the PSBs and send a copy to the budget division of DEA.
2. GoI shall settle such claims by the banks within 5 working days from the date of claim.
3. Upon recovery of the accounts for which the purchasing bank had invoked the GoI guarantee and received the claim from GoI, the guarantee amount, or the amount recovered, whichever is lower, should be passed on by banks to the GoI within 5 working days from the days of receipt in its books, subject to the condition that in case the guarantee amount is lower than the recovery shortfall the gap would be filled by the bank receiving the guarantee, but when the recovered amount is higher than the guarantee amount, than the excess over the guarantee amount would be kept by the bank.
4. Any loss crystalized up to 24 months is eligible for claim from GoI under the Scheme, provided such pooled assets are not (a) bought back by the concerned NBFCs/HFCs or (b) sold by the purchasing bank to other entities.

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).

The NBFCs/HFCs whose assets are sold under this Scheme shall undertake the following:

• It should rework the Asset Liability structure within three months to have positive ALM in each bucket for the first three months and on cumulative basis for the remaining period.
• At no time during the period for exercise of the option to buy back the assets, should the CRAR go below the regulatory minimum. The promoter shall ensure this by infusing equity, where required.

6-Feb-2020: RBI extends one-time restructuring Scheme for MSME loans to December 31, 2020

The Reserve Bank of India (RBI) has extended the deadline for one-time debt recast for firms in the micro, small and medium enterprises (MSME) sector that are in default but have not been classified as non-performing.

It has been decided to extend the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST-registered MSMEs that were in default as on January 1, 2020. The original scheme was applicable for standard MSME accounts as of January 1, 2019, while the restructuring was to be implemented by March 31, 2020.

The restructuring under the scheme has to be implemented latest by December 31, 2020. This will benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated January 1, 2019 as also the MSME entities which have become stressed thereafter.

The central bank has also asked commercial banks to link pricing of loans for the medium-sized enterprises to an external benchmark effective April 1, 2020. The step was taken with a view to further strengthening monetary transmission.

Under the scheme, accounts in the micro, small and medium enterprises segment which are in default but are still standard, can be restructured once, without any downgrade on their asset classification. A provision of 5 percent in addition to the provisions already held, shall be made in respect of accounts restructured under this scheme.

The micro, small and medium enterprises (MSMEs) sector plays an important role in the growth of the Indian economy, contributing over 28% of the gross domestic product (GDP), more than 40% of exports, while creating employment for about 110 million people.