Cabinet okays change in partial credit guarantee scheme for NBFCs

Post the modification, the scheme will be extended to bonds or commercial papers (CPs) issued by NBFCs, housing finance companies, and micro finance companies, whereby the government would provided the sovereign portfolio guarantee of up to 20 per cent of first loss for purchase of bonds or commercial papers (CPs) issued by the financial institutions.

Papers with 'AA' rating and below, including unrated papers with original or initial maturity of up to one year, will be eligible under the scheme.

The existing scheme was issued on December 11, 2019, offering sovereign guarantee of up to 10 per cent 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 and MFCs.

As per an official statement, the outbreak of COVID-19 along with lockdown of business activity has now necessitated adoption of additional measures to support NBFCs and HFCs.

Further, the Cabinet on Wednesday also gave its approval to the proposal of the Ministry of Finance to launch a new Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to improve liquidity position of theses companies.

As per the initiative, a large public sector bank would set up a special purpose vehicle (SPV) to manage a stressed asset fund which would issue interest bearing special securities guaranteed by the government of India, to be purchased by the RBI only.

The SPV would issue securities as per the requirement, subject to a total amount of securities outstanding not exceeding Rs 30,000 crore to be extended by the amount required as per the need.

The securities issued by the SPV would be purchased by the RBI and proceeds thereof would be used by the SPV to acquire the debt of at least investment grade of short duration with residual maturity of up to three months of eligible NBFCs and HFCs.

The direct financial implication for the Centre is Rs 5 crore, which may be the equity contribution to the SPV. Beyond that, 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.

The measures are part of the Rs 20 lakh crore economic package recently announced by the government.