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Govt relaxes norms of Partial Credit Guarantee Scheme for HFCs, NBFCs

Finance Minister, Nirmala Sitharaman last week announced Partial Credit Guarantee Scheme 2.0 worth Rs. 45,000 crore for Micro Finance Institutions (MFIs) and Non- Banking Financial Companies (NBFCs).

May 21, 2020 12:52 IST
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The Union Cabinet, chaired by Prime Minister Narendra Modi, decided on May 20 to relax the norms of the Partial Credit Guarantee Scheme. The cabinet has also extended its time period to widen the coverage to include a large number of microfinance institutions, HFCs, and NBFCs.

Finance Minister, Nirmala Sitharaman last week announced Partial Credit Guarantee Scheme 2.0 worth Rs. 45,000 crore for Micro Finance Institutions (MFIs) and Non- Banking Financial Companies (NBFCs). The scheme was part of Rs. 21 lakh crore special economic package amid the ongoing COVID-19 pandemic.

As per the official release, NBFCs, MFIs, and HFCs have an essential role in sustaining the consumption demand as well as capital formation in the small and medium segments. The continuous funding without any disruptions is significant for them and the extended PCGC will help in doing so.

Details of modified Partial Credit Guarantee Scheme (PCGS):

The Union Cabinet has extended the time period of PCGS from June 30, 2020, to March 31, 2021. The time has been extended for the purchase of pooled assets of the distressed entities.

The official release of the government mentioned that under the modified scheme by the cabinet, state-owned banks will be provided with a sovereign guarantee of up to 20 percent of first loss for the purchase of bonds or commercial papers of Micro Finance Institutions (MFIs), Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) that have a credit rating of AA or below, including unrated paper with an original maturity of Up to 1 year.

The modification also mentioned that NBFCs/HFCs that have been reported under the Special Mention Account (SMA-1) category because of technical reasons alone during the last one year period prior to August 1, 2018, will be eligible to be benefited under the scheme. Earlier NBFCs/HFCs that were reported as SMA-1 or SMA-2 during the specified period were ineligible.

Under the scheme, the union govt has also relaxed the net profit criteria. Hence, those entities that have made a net profit in at least one of the three financial years of 2017-18, 2018-19, and 2019-20 will be eligible. Earlier only those entities were eligible who had made a net profit in 2017-18 or 2018-19.

A requirement of PCGS modifications due to COVID-19:

As per the release, the outbreak of COVID-19 pandemic along with the lockdown of business activity has made it necessary to adopt additional measures to support NBFCs and HFCs. The official release by the cabinet also mentioned that the modifications will enable wider coverage of the scheme.

The release added that the lockdown restrictions will have a negative impact on both the collections and fresh loan disbursements along with a major effect on an overall economy. There will be results not only in the asset quality issues for HFC/NBFC/MFI sector but also on the loan growth as well as the higher borrowing costs for the sector along with an effect on Micro, Small, and Medium Enterprises (MSMEs) which borrow from them.

The sector is most likely to face increasing challenges on the liabilities side as the RBI moratorium provides relief on the asset side. The extension of PCGS will address the concerns of the liability side. Modifications in the scheme will also enable wider coverage of the scheme on the asset side also.

Background:

The existing Partial Credit Guarantee Scheme (PCGS) was issued on December 11, 2019, by the government. At that time, it offered the sovereign guarantee of up to 10 percent of the first loss to PSBs for the purchase of pooled assets from financially sound NBFCs, rated BBB+ or above up to Rs. 1 lakh crore.

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