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Partial credit guarantee scheme to PSBs

Topics covered:

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Partial credit guarantee scheme to PSBs

 

What to study?

For prelims and mains: The scheme- need, challenges present and significance.

 

Context: In pursuance of the announcement made in the Union Budget 2019-20, the Government has issued a scheme regarding partial credit
 guarantee.

The scheme provides for a one-time partial credit guarantee to PSBs for purchase of pooled assets of financially sound NBFCs.

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.

 

Significance:

The stress on NBFCs and HFCs is seen as a key reason for a slowdown in the economy, as it has caused reduced credit flow to small businesses and consumers. 

The step would provide liquidity to NBFCs and enable them to continue to play their role in meeting the financing requirements of productive sectors of economy.

Notable facts:

  1. As per the guidelines of the scheme announced in the budget, the Department of Economic Affairs will provide government guarantee of up to 10% of the fair value of assets purchased by a bank from a stressed NBFC or HFC. The scheme is capped at Rs 1 lakh crore and will be open for up to six months. 
  2. The Department of Financial Services will obtain information on transactions in a prescribed format from PSBs and send a copy to the budget division of the Department of Economic Affairs. The government will settle claims by banks within five working days. 
  3. NBFCs will have to pay a fee to the government, at 0.25% per annum of the fair value of assets sold to banks. They will be able to sell 20% of standard assets, worth up to Rs 5,000 crore, as on March 31. 
  4. Assets sold must be at least AA or equivalent rated and the NBFC/HFC selling assets should have appropriate capital, net NPAs of less than 6% and been profitable for the last two financial years. 
  5. NBFCs will also have to rework the asset-liability structure within three months to have a positive asset liability management in each bucket for the first three months and on cumulative basis for the remaining period.
  6. The one-time guarantee on the pooled assets will be valid for 24 months from the date of purchase and can invoked in specified circumstances. The guarantee shall cease earlier if the purchasing bank sells the pooled assets to the originating NBFC or HFC or any other entity before the validity of the guarantee period.