Govt OK’s partial credit guarantee scheme to solve liquidity issue
Non-Banking Finance Companies (NBFCs) and Housing Finance Companies, who are beset with serious liquidity crunch, have something to cheer about. The Union Cabinet on Wednesday approved “Partial Credit Guarantee Scheme” from Public Sector Banks to provide loans or resolve their temporary liquidity or cash flow mismatch issues.
The Cabinet meeting chaired by Prime Minister Narendra Modi also approved amendments to Insolvency Act and infusing additional Rs 5,300 crore capital into IIFCL through recapitalisation Bonds. Another Rs 10,000 crore will be infused in 2020-21, sources said.
The proposed Government Guarantee support and resultant pool buyouts will help address NBFCs/HFCs resolve their temporary liquidity or cash flow mismatch issues, and enable them to continue contributing to credit creation and providing last mile lending to borrowers, thereby spurring economic growth.
“Partial Credit Guarantee Scheme, to be offered by the Government of India (Gol) to Public Sector Banks (PSBs) for purchasing high-rated pooled assets from financially sound Non-Banking Financial Companies (NBFCs)/Housing Finance Companies (HFCs), with the amount of overall guarantee being limited to first loss of up to 10% of fair value of assets being purchased by the banks under the scheme, or Rs 10000 crore, whichever is lower, as agreed by Department of Economic Affairs (DEA).
“The scheme would cover NBFCs/HFCs that may have slipped into SMA-0 category during the one year period prior to 1 August 2018, and asset pools rated “BBB+” or higher. The window for one-time partial credit guarantee offered by Gol will remain open till 30 June 2020 or till such date by which Rs 1,00,000 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,” said the Government in a statement.
This will provide liquidity to the NBFC/HFC concerned for financing the credit demand of the economy, and also protect the financial system of the country from any adverse contagion effect that may arise due to the failure of such NBFCs/HFCs.
The Cabinet approved infusing additional Rs 5,300 crore capital into IIFCL through recapitalisation bonds in the current fiscal year. Another Rs 10,000 crore will be infused in 2020-21. “This will be done through regular budgetary support and/or through issuance of recapitalisation bonds,” an official statement said.
The Cabinet also approved changes to the insolvency law, including provision to ring-fence successful resolution applicants from criminal proceedings with regard to offences committed by previous promoters of a company. The amendments to the Insolvency and Bankruptcy Code (IBC) are aimed at removing certain difficulties being faced during insolvency resolution process to realise the objects of the code and to further ease doing of business, an official release said.
The IBC (Second Amendment) Bill, 2019, seeks to change various sections as well as insert a new section in the law. According to the release, the amendments would remove bottlenecks, streamline the corporate insolvency resolution process and that protection of last mile funding would boost investment in financially-distressed sectors.
