Government issues Scheme to provide a one-time partial credit guarantee to PSBs for purchase of pooled assets of financially sound NBFCs. The step would provide liquidity to NBFCs and enable them to continue to play their role in meeting the financing requirements of productive sectors of economy
Government of India
Ministry of Finance
Department of Financial Services
3rd floor, Jeevan Deep Building
Parliament Street, New Delhi-110 001
Date: 10th August 2019
1. Chairman, State Bank of India
2. MD& CEOs of Public Sector Banks
3. CMD,Small Industries Development Bank of India
Subject: Partial Credit Guarantee offered by Government of India (GoI ) to Public Sector Banks (PSBs) for purchasing high-rated pooled assets from financially sound Non-Banking Financial Companies (NBFCs)/ Housing Finance Companies (HFCs)
Please refer to the following announcement made in finance Minister’s speech on the Union Budget 2019-20:
‘‘For purchase of high-rated pooled assets of Financial sound NBFCs, amounting to a total of rupees one lakh core during the current Financial year, Government will provide one time six months’ partial credit guarantee to Public Sector Banks for first loss of tip to 10%.“
2. In pursuance of the aforesaid Budget Announcement, and to operationalise the same, the following Scheme regarding partial credit guarantee is hereby issued with the consent of the Department of Economic Affairs (DEA), and with the approval of the competent authority:
Name of the Scheme: ‘Partial Credit Guarantee offered by Government of India (Go ) to Public Sector Banks (PSBs) for purchasing high-rated pooled assets from financially sound Non-Banking Financial Companies (NBFCs)/ Housing Finance Companies (HFCs)’, hereinafter referred to as the ‘Scheme’.
Objective: To address temporary asset liability mismatches of otherwise solvent NBFCs/ HFCs without having to resort to distress sale of their assets for meeting their commitments.
Validity of the scheme: The window for one-time partial credit guarantee offered by Gol will open from the date of issuance of the Scheme by the Government for a period of six months, or till such dare by which Ru pees One lakh crore assecs gee purchased by banks, whichever is earlier.
A. Operational Guidance:
(i) The assets shall be purchased by ban ks ac fair value.
(ii) Assets to be assigned by NBFCs/ HFCs muse be raced by Credit Rating Agencies (CRAs) accredited by Reserve Bank of India (RBI).
(iii) One-time guarantee provided by the Gol on the pooled assets will be valid for 24 months from the dace 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.
B. Eligible NBFCs/HFCs:
(i) The NBFCs registered with RBI under the Reserve Bank of India Act, excluding those registered as Micro Finance Institutions and Core Investment Companies.
(ii) 1-IFes registered with National Housing Bank (NHB) under the National Housing Bank Act.
(iii) The CRAR of NBFCs/CAR of HFCs should not be below the regulatory minimum (i.e. 15% for NBFCs and 12% for HFCs) as on 31.3.2019.
(iv) Their net Non-Performing Asset should not be more than 6% as on 31.3.2(119.
(v) They should have made a net profit in at least one of the last two preceding financial years (is. FY 2017-18 and 2018-19).
(vi) The NBFCs/HFCs should not have been reported under SMA category by any bank for their borrowings during last one year prior to 1.8.2018.
(vii) Micro Finance Institutions and Core Investment Companies are not covered under the Scheme.
C. Eligible assets:
(i) Assets originated up to 31.3.2019 will only be eligible under this scheme.
(ii) Assets should be standard in the books of NBFCs/HFCs on the date of sale.
(iii) The pool of assets should have minimum rating of ‘AA’ or equivalent at fair value prior to the partial credit guarantee by Gol.
(iv) Each account under the pooled assets should have been fully disbursed and security charge should have been created in favour of the originating NBFCs/ HFCs.
(v) 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.
(vi) The underlying assets should represent the debt obligations of a homogeneous pool of obligors and individual asset size in the pool is capped at Rs. 5 crore asset pool should be sufficiently granular).
(vii) Originating NBFCs/HFCs cannot assign the following assets under this Scheme:
a) Revolving credit facilities;
b) Assets purchased from other entities: and
c) Assets with bullet repayment of both principal and interest.
D. Invocation of Guarantee:
The purchasing bank can invoke the GoI guarantee if the interest and/or instalment of principal remains overdue for a period of more than 90 days (ie. when liability is crystalised for the underlying borrower) during the validity of such guarantee, subject to the condition that the guarantee is for the first loss up to 10 per cent.
E. Reporting and claims:
(i) There should be a process of real time reporting of such transactions by the banks to Gol and to get the information on remaining available headroom for purchase of such pooled assets. The Department of Financial Service Ministry of Finance would obtain the requisite information in a prescribed format from the PSBs and send a copy to the budget division of DEA.
(ii) GoI shall settle such claims by the banks within 5 working days from the date of claim.
(iii) Upon recovery of the accounts for which the purchasing bank had invoked the Go! guarantee and received the claim from Gol, the guarantee amount, or the amount recovered, whichever is lower, should be passed on by banks to the Gol within 5 working days from the days of receipt in its books, subject to the condition that in case the guarantee amount is lower than the recovery shortfall the gap would be filled by the bank receiving the guarantee, but when the recovered amount is higher than the guarantee amount, than the excess over the guarantee amount would be kept by the bank.
(iv) Any loss crystalised tip to 24 months is eligible for claim from Gol under the Scheme, provided such pooled assets are not (a) bought back by the concerned NBFCs/HFCs or (b) sold by the purchasing bank to other entities.
F. Guarantee Fees:
NBFCs/HFCs will pay a fee equivalent to 0.25% per annum of the fair value of assets being purchased by the bank under this Scheme to GoI (must be routed through the purchasing hank).
G. The NBFCs/HFCs whose assets are sold under this Scheme shall undertake the following:
(i) It should rework the Asset Liability structure within three months to have positive ALM in each bucket for the first three months and on cumulative basis for the remaining period.
(ii) At no time during the period for exercise of the option to buy back the assets, should the CRAR go below the regulatory minimum. The promoter shall ensure this by infusing equity, where required.
4. Department of Economic Affairs has agreed to extend Government guarantee as per the following:
(i) The amount of overall guarantee will be limited to 10% of fair value of assets or Rs.10,000 cmre, whichever is lower.
(ii) Guarantee will be valid for 2 years from the date of purchase of assets or till the date of sale of assets, whichever is earlier.
(iii) Guarantee will be provided to the PSBs that purchase these assets. Execution of Government guarantee by the administrative Ministries/Department should be done as prescribed under Rule 280 of GFR.
(iv) Guarantee fee will be paid by PSBs @ 0.25% per annum of the fair value of these assets.
(v) Recovery of guarantee fee from the PSBs concerned will be the responsibility of DFS. Guarantee fee should be levied before the guarantee is given and thereafter on 1″ April every year. The rate of guarantee fee is to be applied on the amount outstanding at the beginning of the guarantee year. Late payment of guarantee fee attracts penal rate, i.e., double the normal rate of guarantee for the period of default. Rule 279 GFR prescribes the provisions of guarantee
(vi) Guarantees should be reviewed annually as prescribed under Rule 281 of GFR.
(vii) This is subject to DES, as the Administrative Department, ensuring compliance of the scheme guidelines with Chapter 11 of the GER, 2017.
5. It has further been decided that while the overall responsibility of DES as administrative ministry for execution and monitoring of guarantees under Chapter II including Rule 280 of GFR shall remain, and the primary responsibility for guarantee execution will be of DFS, the responsibility for discharge on behalf of DES, of certain other functions such as evaluation of bank proposals for execution of guarantees, keeping record of transactions and determination of guarantee headroom, examination of claims, and monitoring of recoveries in accounts for which guarantee has been invoked, shall be delegated to S11)111.
6. In order to give effect to the Scheme proposed above, the following operational guidelines are hereby conveyed:
(i) The PSB concerned shall submit the proposal for execution of guarantee under the Scheme to SIDBI along with rating details of the assets proposed to be assigned by the NBEC/IIEC, and a certificate to the effect that—
(a) the proposal complies with the relevant provisions of Chapter II GFR in general, and with Rule 280 GER in particular, and
(b) the NBEC/HFC concerned fulfils the eligibility criteria stipulated under heading ‘B’ of the Scheme. The P513 concerned shall also submit the requisite documents in this regard.
(ii) 510131 shall in turn evaluate the proposal to ensure that it fulfils the relevant provisions of Chapter 11 GER in general, and Rule 280 GER in particular, and is in conformity with the Scheme, and thereafter forward the proposal to DES with its specific recommendation regarding execution of guarantee or otherwise. Once decision to execute the guarantee is taken by DES. n shall convey its consent to SIDBI and the PSB concerned. The NB concerned shall then deposit the guarantee fee and submit receipt to DES, with a copy endorsed to 510131 for record. The guarantee shall thereafter be executed by DES.
(iii) Immediately on completion of any transaction for pool purchase under the Scheme, the PSB concerned shall submit to 510131 the details of such transaction in a format to be prescribed by SID131, so as to ensure real•time reporting of transactions under the Scheme to 51001 and to make available information on remaining available headroom for purchase of such assets. SIDBI shall in turn also immediately report the details of such transactions to DES, which will send a copy of the same to the budget division of DE.1.
(iv) Banks shall submit claims for invocation of guarantee to 51081, which shall examine the claim to ensure that it is in conformity with the Scheme and relevant provisions of Chapter 11 of GER. On being satisfied of the admissibility of the claim, S11)131 shall recommend invocation of the guarantee to DES within 2 working days of the claim being received by it. DES shall thereafter take the steps necersaty for settlement of the clan.
(v) SIDBI shall also monitor the recovery in accounts for which purchasing banks had invoked the Government guarantee so as to ensure that the provisions contained in pan E(iii) of the Scheme arc complied with.
7. All PSlis are requested to adhere to the provisions of the Scheme, and to ensure along with SIDBI that the operational guidelines in this regard are scrupulously followed
Under Secretary to the Government of India