To kick-start economy, Modi govt announces big relief for NBFCs and HFCs
To kick start the economy through easing the liquidity crisis in financially sound NBFC's and HFC's, Government issues scheme regarding partial credit guarantee. The Scheme would enable the public sector banks (PSBs) to purchase pooled assets of financially sound NBFCs amounting to Rs. one lakh crore.
Manish Kumar, Delhi, AUG 13: To kick start the economy through easing the liquidity crisis in financially sound NBFC's and HFC's, Government issues scheme regarding partial credit guarantee. The Scheme would enable the public sector banks (PSBs) to purchase pooled assets of financially sound NBFCs amounting to Rs. one lakh crore.
It is expected that this measure would provide liquidity to the NBFC Sector and, in turn, enable them to continue to play their role in meeting the financing requirements of the productive sectors of economy including MSME, retail and housing.
It may be recalled that in her budget speech on 5th of July 2019 Union Finance Nirmala Sitharaman had made the announcement to support fundamentally sound Non-Banking Financial Companies (NBFCs) in getting continued funding from banks. She announced that, “For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rupees One lakh crore during the current financial year. Government will provide one time six months’ partial credit guarantee to Public Sector Banks for first loss of up to 10%.”
As far as the operational guidance for the scheme is concern
I) the assets shall be purchased by banks at fair value.
(ii)Assets to be assigned by NBFCs/HFCs must be rated by Credit Rating Agencies (CRAs) accredited by Reserve Bank of India (RBI).
(iii) One-time guarantee provided by the GoI on the pooled assets will be valid for 24 months from the date of purchase and can be invoked on the occurrence of default as outlined under heading 'D' below. The guarantee shall cease earlier if the purchasing bank sells the pooled assets to the originating NBFC/HFC or any other entity, before the validity of the guarantee period.
(iv)The purchasing banks may have service level agreements with the originating NBFCs/HFCs for servicing, including administration of the individual assets.
(v)The NBFCs/HFCs can have the option to buy back their assets after a specified period of 12 months as a repurchase transaction, on a right of first refusal basis.
Eligibility of NBFCs/HFCs who can gain from one time partial gurantee have been specified by the govt. The NBFCs registered with RBI under the Reserve Bank of India Act, excluding those registered as Micro Finance Institutions and Core Investment Companies and HFCs registered with National Housing Bank (NHB) under the National Housing Bank Act can take benefit of the scheme.
Assets originated up to 31.3.2019 of NBFCs and HFCs will only be eligible under this scheme. Assets should be standard in the books of NBFCs/HFCs on the date of sale. The pool of assets should have minimum rating of 'AA' or equivalent at fair value prior to the partial credit guarantee by GoI. NBFCs/HFCs can sell up to a maximum of 20% of their standard assets as on 31.3.2019 subject to a cap of Rs. 5,000 crore at fair value. Any additional amount above the cap of Rs. 5,000 crore will be considered on pro rata basis, subject to availability of headroom.
Upon recovery of the accounts for which the purchasing bank had invoked the GoI guarantee and received the claim from GoI, the guarantee amount, or the amount recovered, whichever is lower, should be passed on by banks to the GoI within 5 working days from the days of receipt in its books.
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