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Partial Credit Guarantee scheme for NBFCs - Too little for removing stress?
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Background  

The Government officially notified guidelines on Partial Credit Guarantee (PCG) scheme announced during the Union Budget for PSU banks to purchase high-rated pooled assets from financially sound (well capitalized and profitable) NBFCs/HFCs. The scheme was announced to provide liquidity support to the financial sector that is currently under duress. The key change from the announcement during the budget is the increase in credit loss period from 0.6 cr earlier to 2.4 cr, which is a welcome move. The Government would charge a guarantee fee of 25bps per annum each from the PSU banks as well as the originating NBFC/HFC. Portfolio sell-down by an individual NBFC/HFC has been capped at Rs5000cr or 20% of total standard assets (whichever is lower)  

Eligibility criterion for NBFC/HFCs to sell down assets

  1. Should have reported profit during either FY18 or FY19 and must have capital above regulatory requirements (15% for NBFCs and 12% in the case of HFCs);
  2. Net NPA should be less than 6% as on 31st Mar’19;
  3. Should not be an SMA-1/SMA-2 (Special mention account) with any bank during Aug’18-Aug’19  

The Special Mention Account identification is an effort for early stress discovery of bank loans. It was introduced as a corrective action plan to contain stress. As per the SMA regulations, banks should identify potential stress in the account by creating a new sub-asset category viz. ‘Special Mention Accounts’ (SMA).  

  1. Should be rated AA or better by external credit rating agencies; 
  2. Each account in the pool of assets must be fully disbursed; 
  3. Pool of assets must be originated before 31st Mar’19; 
  4. Only granular loans are eligible (ticket size less than Rs50mn) 
The last point is significant as this effectively rules out wholesale loans from the PCG scheme but effectively covers over 90% of the retail loans.
 
Conclusion:
  1. NBFCs/HFCs starved of liquidity have been selling down their retail portfolios to manage the liquidity squeeze. This may arrest the fall of selling aggressively.
  2. Better rated NBFCs/HFCs are not facing higher liquidity challenges though their cost of capital has increased. This scheme mostly benefit them.
  3. Mid and small sized PSU banks are unlikely to participate in this scheme due to capital constraints.
  4. Better capitalized large PSU banks are more likely to buy out portfolios under this scheme.
  5. Shunning out wholesale books of stressed HFCs/NBFCs indicate ostrich mentality as that is the major source of stress currently.  Too little, too late!

 

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