Cabinet approves Partial Credit Guarantee Scheme

Union Cabinet approved the ‘Partial Credit Guarantee Scheme’ that allows public sector banks (PSBs) to purchase high-rated pooled assets from financially sound non-banking finance companies (NBFCs) and housing finance companies (HFCs). However, the amount of overall guarantee has been limited to first loss of up to 10% of fair value of assets (FAV) being purchased by banks under the scheme or Rs.10,000 crore, whichever is lower, as agreed by department of economic affairs (DEA), Union Ministry of Finance.

About Partial Credit Guarantee Scheme

The proposed government guarantee scheme will help NBFCs and HFCs to resolve their temporary liquidity and would enable them to continue contributing towards credit creation or cash flow mismatch issues. It will also provide last mile lending to borrowers, which will spurr economic growth.

Scheme would cover NBFCs and HFCs that may have slipped into ‘SMA-0’ category during the 1 year period prior to 1 August 2018, and asset pools rated ‘BBB+ or higher’.

Scheme will provide liquidity to NBFCs and HFCs concerned for financing credit demand of economy, and would also protect financial system of country from any adverse contagion effect that may arise due to failure of such entities.

Window: The window for one-time partial credit guarantee offered by government will remain open till 30 June 30 or till such date by which Rs. 1 lakh crore assets get purchased by banks, or whichever is earlier. Union Finance Minister has been delegated the power to extend the validity of scheme by up to three months taking into account its progress.

Background: Earlier, in 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 current financial year, government will provide one time 6 months’ partial credit guarantee to PSBs for first loss up to 10%.

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