Central government has notified the NBFCs Partial Guarantee Scheme as promised in the Budget to throw NBFC’s a 1 lakh crore lifeline. This scheme for non-banking and housing finance companies (NBFCs & HFCs) will provide liquidity support. NBFCs Budget Partial Guarantee Scheme guidelines are out which will allow state run banks (PSBs) to purchase their assets.
NBFCs aims to provide liquidity support to avoid distress sale of assets in a sector facing a shortage of cash due to asset liability mismatch. The stress on NBFC’s and HFC’s is a major reason for slowdown in the economy.
This stress on NBFCs and HFCs has caused reduced credit flow to small businesses and consumers.
NBFCs Budget Partial Guarantee Scheme Guidelines
The central govt. is going to put in a mechanism to ensure NBFCs Budget Partial Guarantee Scheme takes on ground. This will elicit information on a real time basis on the working of partial guarantee scheme. The central govt. has sought real time reporting of transactions under it. As per guidelines, Department of Economic Affairs would provide govt. guarantee of upto 10% of fair value of assets purchased by bank from stressed NBFC or HFC.
NBFCs Partial Guarantee Scheme is capped at Rs. 1 lakh crore and will remain open for upto 6 months. Dept. of financial services will obtain information on transactions in prescribed format from PSBs. Then a copy would be sent to budget division of Dept. of Economic Affairs. The central govt. will settle claims by banks within 5 working days.
NBFCs have to pay government fees of 0.25% p.a of fair value of assets sold to banks. This scheme will enable government to sell 20% of standard assets worth upto Rs. 5,000 crore (as on 31 March). All the assets sold must be of at-least AA or equivalent rated. All the NBFC / HFC selling assets must have appropriate capital, net NPAs of less than 6% and in profitable stage for the past 2 financial years.
All the NBFCs will have to rework asset liability structure within 3 months. This will have positive asset liability management in each bucket for first 3 months and on cumulative basis for remaining period. This 1 time guarantee of pooled assets would remain valid for 24 months. This validity is from date of purchase and can be invoked in specified circumstances.
NBFC Partial Guarantee Scheme will cease guarantee in case the purchasing bank sells pooled assets to originating NBFC or HFC or any other entity before validity of guarantee period. The purchasing bank can invoke guarantee in case interest / installment of principal remains overdue for a duration of more than 90 days. This duration is applicable during validity of such guarantee. However, there is a condition that guarantee is for first loss of upto 10%.