Centre issues guidelines for granting Rs 1 trillion credit guarantee for NBFCs

In a bid to help the Financially sound NBFCs (Non- Banking Financial Companies), including Housing Finance Companies (HFCs), which are facing stress following stocks of defaults, the Central Government has issued guidelines  of partial guarantee  scheme covering a maximum standard asset value of Rs 1 trillion under which state-run public-sector banks(PSBs) can purchase high-rated pooled assets  originated up to March 31, 2019, from NBFCs.Key points:
i. Guarantee: Central government will provide a one-time 6 months’ partial credit guarantee to PSBs for first loss of up to 10 %( valid for 24 months from the date of purchase).
ii. Reducing the stress:  This credit guarantee will address temporary asset-liability mismatches of NBFCs & help rework the Asset Liability structure within 3 months to have positive Asset Liability Management(ALM) in each bucket for the first 3 months and on cumulative basis for the remaining 3 month period.
iii. Buyback option: NBFCs have the option to buy back the assets after 12 months & at no time during the period for the exercise of the option to buy back the assets.
iv. Criteria: The credit rating of the pool of assets should be at least ‘AA’ or equivalent at fair value. Assets below that rating will not qualify under this guarantee.
v. Ticket value: NBFCs registered with RBI /HFCs registered with National Housing Bank (NHB)will be only eligible & they should at best liquidate 20% of their standard assets as on March 31, 2019, which otherwise qualify as above subject to a maximum cap value of Rs 5,000 crore.
vi.CRAR & CAR ratio: The guidelines stipulate that the CRAR (capital to risk-weighted assets ratio)of NBFCs/ CAR (Capital Adequacy Ratio) of HFCs should not be below the regulatory minimum of 15 % & 12 % respectively and net Non-Performing Asset(NPA) should not be more than 6 %.
vii. The banks can consider an asset a default if there interest and/or installment of principal remains overdue for 90 days.
viii. Background: Finance minister Nirmala Sitharaman announced this scheme in her FY20(Fiscal year) budget.