The Union Cabinet on Wednesday gave its approval to the "Partial Credit Guarantee Scheme" that allows public sector banks (PSBs) to purchase high-rated pooled assets from financially sound NBFCs and HFCs. The amount of overall guarantee has been 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 proposed government guarantee scheme will help non-banking financial companies (NBFCs) and housing finance companies (HFCs) to resolve their temporary liquidity and enable them to continue contributing to credit creation or cash flow mismatch issues, and providing last mile lending to borrowers, thereby spurring economic growth.
"The scheme would cover NBFCs and HFCs that may have slipped into SMA-0 category during the one year period prior to August 1, 2018, and asset pools rated "BBB+" or higher," Cabinet said in a statement.
In the Union Budget 2019-20, the government had announced that for purchase of high-rated pooled assets of NBFCs, amounting to a total of Rs 1 lakh crore during the current financial year, government will provide one time six months' partial credit guarantee to PSBs for first loss up to 10 per cent.
The scheme will provide liquidity to the NBFCs and HFCs concerned for financing the credit demand of the economy, and would also protect the financial system of the country from any adverse contagion effect that may arise due to the failure of such entities.
As per the Cabinet statement, the window for one-time partial credit guarantee offered by government will remain open till June 30, 2020 or till such date by which Rs 1 lakh 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," Cabinet added.
Edited by Chitranjan Kumar