As a part of the Rs.20 lakh crore stimulus package, the cabinet extended the earlier partial credit guarantee (PCG) scheme. The earlier scheme operationalised post amendments in December 2019 in order to extend relief to NBFCs. The earlier PCG Scheme was offering sovereign guarantee of up to 10% of first loss to PSBs for purchasing pooled assets rated BBB+ or above worth up to Rs.100,000 crore, from financially sound NBFCs/ MFIs.
PCGS 2.0 focuses on providing liquidity support to the beleaguered mid-sized NBFCs/HFCs/MFIs. PCGS 2.0 is to address temporary liquidity/cash flow mismatches of otherwise solvent NBFCs/HFCs/MFIs and to enable availability of additional liquidity for them for lending purposes.
The window for this PCGS will remain open till March 31, 2021, for the purchase of pooled assets and till August 2020 for the purchase of Bonds/CPs or till such date by which Rs.10,000 crore worth of guarantees are provided by Government of India (GoI), whichever is earlier.
The scheme is for purchase of Bonds/CPs of NBFC/HFC/MFI by PSBs and purchase of assets of NBFC/HFC by PSBs. The separate details for both instruments are below:
Purchase of Bonds/CPs
Portfolio guarantee for purchase by PSBs of Bonds or CPs with a rating of AA and below (including unrated instruments with original or initial maturity of upto 1 year) issued by NBFCs / HFCs / MFIs (in case of MFIs Bonds/ CPs with MFR rating equivalent).
Validity of the Scheme
The portfolio to be eligible under the scheme should be built up within 3 months of announcement of scheme (i.e., by August 2020) for the purchase of Bonds/CPs or till such date by which Rs.10,000 crore worth of guarantees (including both guarantees towards purchase of pooled assets and Bonds/CPs) are provided by GoI, whichever is earlier.
I. Operational Guidance for Purchase of bonds/ CPs
a) At the portfolio level, AA and AA- investment should not exceed 25% of the total portfolio of Bonds/CPs purchased by (if a PSB invests in portfolio of assets amounting Rs.100 crore for purchase of Bonds/CPs under this scheme, only Rs.25 crore can be invested in AAand AA rating).
b. Purchased Bonds / CPs shall be held on investment book of public sector banks (PSBs).
c. Individual PSBs may buy up to 20% of their total non-SLR bondholding through this route.
d. Portfolio built under this scheme should be built within 3 months from the date of announcement of this scheme (that is by August 2020) and the PSBs concerned will submit requisite details to SIDBI for issuance of guarantee. SIDBI will verify compliance and ensure that the guarantee limit of overall proposals together were within Rs.10,000 crore. Formal letter of guarantee will be issued by Department of Financial Services (DFS) upon confirmation from SIDBI.
e. SIDBI will indicate an initial tentative inter-se allocation of limits to the banks to ensure the total guarantee (including already committed amounts) remains within approved sum of Rs.10,000 crore.
f. PSBs shall use their available liquidity for purchase of Bonds/CPs under this scheme.
g. Total issuance under this scheme by a single NBFC/HFC/MFI to all PSBs is capped at 1.25 times of total maturing liability over a period of six months from the date of issue of Bonds/ CPs.
h. The one-time guarantee shall be co-terminus with the tenure of the instrument and may be invoked on the occurrence of Default (on 0+ basis).
The concerned PSBs shall finalise the terms of issue bilaterally with the issuer.
II. Eligibility of NBFC/HFC/MFI for Purchase of bonds/ CPs
a. NBFCs registered with RBI
b. MFIs which are members of self-regulatory organisations recognised by RBI
c. HFCs registered with NHB.
d. Government-owned NBFCs / HFCs will not be eligible.
III. Eligible Bonds/CPs
a. All bonds/CPs shall be of primary issue only.
b. Bonds/CPs purchased shall have a rating of AA and below given by CRAs accredited by RBI. Purchase of unrated papers issued by NBFCs/HFCs/MFIs shall be limited to papers with original or initial maturity of up-to one year for which there is no listing or rating requirement as per PBI guidelines.
c. The tenure of the Bonds/CPs shall be 9 months to 18 months except unrated papers whose initial/ original maturity should not exceed one year.
IV. Invocation of guarantee for Purchase of bonds/ CPs
a. The purchasing bank can invoke Government of India guarantee in case of default in servicing of the Bond/CP on its attaining maturity subject to the condition that the guarantee shall be for the first loss up to 20% of the face value at crystallised portfolio level.
V. Guarantee fees
a. The amount of overall guarantee will be limited to 20% of face value at portfolio level subject to overall ceiling of Rs.10,000 crore.
b. Guarantee will be co-terminus with the tenure of the instrument for purchase of bonds/CPs.
c. Guarantee agreement will be between PSBs and GoI on the portfolio of Bonds/CPs of PSBs.
d. Guarantee fee will be paid by PSB @0.25% of the face value of the crystallised portfolio level of the bonds/CPs before the issue of guarantee (i.e., 1.25% of the guaranteed amount)
VI. Participating NBFC/HFC/MFI shall undertake the following
a. It should rework Asset liability structure within 3 months to have positive ALM in each bucket for the first 3 buckets and on cumulative basis for the remaining of the buckets.
CARE Ratings’ View
a. The scheme will enable mid-sized NBFC/HFC/MFIs to generate liquidity for repayments of debt as at-least 75% of the total Bonds/CPs purchased by banks under this scheme will go to A+ and below rated companies. Though the scheme allows even investment in unrated entities, there is no specific allocation for lower rated/unrated entities
b. The scheme is for refinancing of debt maturing in next 6 months (with the maximum cap of 1.25 times the maturing liability in the succeeding 6 months). Any additional funds (other than funds raised through this scheme) raised by NBFC can be used as revival of disbursement.
c. The scheme is suitable for the NBFC/HFC/MFI where the onward lending to the asset classes having shorter to medium tenor as the tenor for the Bonds will be 9-18 months. Also, the eligibility will be higher for such NBFC/HFC/MFI as the entities with medium tenor of assets will also have similar tenor in liabilities as the total issuance under this scheme depends on the quantum of maturing liability in the succeeding six months.
d. Higher issuance under this scheme may also result into burden on NBFC/HFC/MFI in terms of higher repayments in 9-18 months from the date of issue of Bonds/CPs with the requirement to pay both the regular payment of their existing debt during that 9-18 months window and repayment of debt raised under this scheme
e. NBFC/HFC/MFI is eligible to raise funds under the scheme only if they can rework on ALM to have positive mismatches in each buckets for the first three months and positive cumulative mismatches in all the other buckets after considering the funds from this scheme.
f. The GoI guarantee is at the portfolio level for each Bank and not at an individual instrument level. The portfolio may depend upon the risk appetite of the bank with respect to different asset classes and credit rating of the underlying entities. Banks may look at smaller ticket size papers of multiple NBFC/HFC/MFIs as the same will diversify their risks. Thus, this scheme is likely to assist smaller NBFCs.
g. This is a portfolio level comfort extended by Central Government. With appropriate mix of higher and lower rated papers, the banks can practically achieve a much better risk mitigation for extending their existing exposures to lower rated/unrated NBFC/HFC/MFI/s.
h. The bonds/CP purchased by the mid-sized PSBs will be limited as individual PSB can buy only up to 20% of their total Non-SLR bondholding.
i. The guarantee will not provide credit enhancement in the standalone rating for the Bonds/CP issued under the scheme mainly on account of two reasons, namely,
j. Banks have a better timeline in this scheme (as compared with TLTRO 2.0 scheme) to build portfolio and purchase papers of NBFC/HFC/MFI. With lower interest shown under the TLTRO 2.0 scheme by the bankers, this scheme may be attractive for the banks with 20% of government guarantee on said papers. However, PSBs (investor) interest in this scheme (purchase of bonds/CPs) remains to be seen with trend in collections (cash flow) NBFC/HFC/MFIs being unclear in majority of the asset classes and further moratorium of 3 months announced by the RBI till August 2020.
Purchase of Assets
Pooled assets having a rating of BBB+ or above from financially sound NBFCs / HFCs by PSBs.
Validity of the Scheme
The window for this PCGS 2.0 will remain open till March 31, 2021, for the purchase of pooled assets or till such date by which Rs.10,000 crore worth of guarantees (including both guarantees towards purchase of pooled assets and Bonds/CPs) are provided by Government of India, whichever is earlier.
I. Operational Guidance for Purchase of assets
a. Assets should be purchased at fair value and rated by Credit Rating Agency (CRA).
b. Guarantee will be valid for 24 months from the date of purchase and can be invoked on the occurrence of Default (if the interest and/or instalment of principal remain overdue for a period of more than 90 days) (on NPA basis).
c. Banks may have service level agreement with originating NBFCs / HFCs.
d. NBFCs/ HFCs can have the option to buy-back after 12 months as a repurchase transaction, on a right of first refusal basis
II. Eligibility of NBFC/HFC/MFI for Purchase of assets
a. NBFCs registered with RBI. HFCs registered with NHB. However, MFIs and CICs shall be excluded.
b. CRAR should not be below regulatory minimum as on March 31, 2019 (NBFC-15%, HFC-12%).
c. Net NPA of the NBFC/HFC should not be more than 6% as on March 31, 2019.
d. Concerned NBFC/HFC should have made net profit at-least once in FY18, FY19 & FY20.
e. NBFCs/HFCs should have been regular or SMA-0 during the last one year prior to August 01, 2018. In addition, entities reported under SMA-1 for technical reasons alone by any bank during the last one year prior to August 01, 2018, would also be eligible provided the lending entity which had reported to CRILC or credit bureaus certifying that the reporting was purely due to technical reasons. NBFCs/HFCs reported under SMA-2 & NPA category shall not eligible.
III. Eligible Assets
a. Assets originated up-to at-least 6 months prior to the date of initial pool rating shall be eligible provided that such assets have repayment history, excluding any moratorium, of at-least a clear six months (i.e., six months repayment track without moratorium).
b. Assets should be standard in the books of NBFC/HFC.
c. Pool of assets should have a minimum rating of ‘BBB+’ or equivalent prior to PCG.
d. Each account should have been fully disbursed and security discharge should have been created in favour of originating NBFC/HFC.
e. NBFCs/HFCs can sell up-to a maximum of 20% of their standard assets as on March 31, 2019, subject to a cap of Rs.5,000 crore at fair value. Any additional amount above the cap will be considered on pro rata basis subject to availability of Headroom.
f. The underlying assets should represent the debt obligations of homogenous pool of obligors and individual asset size is capped at Rs.5 crore (i.e., Retail assets is the focus). g. Originating NBFCs/HFCs cannot assign the following assets
IV. Invocation of guarantee
a. The purchasing bank can invoke Government of India guarantee, if the interest and/or instalment of principal remains overdue for a period of more than 90 days (i.e., when liability is crystallised for the underlying borrower) during the validity of such guarantee, subject to the condition that the guarantee shall be for the first loss up-to 10%.
V. Guarantee fees for purchase of assets
a. The amount of overall guarantee will be limited to 10% of fair value of assets subject to overall ceiling of Rs.10,000 crore.
b. 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.
c. Guarantee fee will be paid by PSB @0.25% of the fair value of the assets being purchased by the bank under this scheme before the issue (i.e., 2.5% of the guaranteed amount)
VI. Participating NBFC/HFC shall undertake the following
a. NBFC/HFC should rework Asset liability structure within 3 months to have positive ALM in each bucket for the first 3 buckets and on cumulative basis for the remaining of the buckets.
b. 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.
CARE Ratings’ View
a. It is worth noting that the guarantee provided for the purchase of pooled assets is over and above the credit enhancement as stipulated in the guidelines. The guarantee will be valid for a period of 2 years.
b. This scheme may be more suited for assets with shorter to medium tenure where the credit enhancement in the form of cash collateral will be enough to cover the required levels post expiry of GOI guarantee with the rundown of portfolio during the said period.
c. With PSL status already enabling banks to purchase the assets of MFIs, MFIs have been excluded under this scheme.
d. Guarantee can be invoked if the underlying customer remains overdue for more than 90 days (i.e., on becoming NPAs). During that time, cash collateral is utilised for making the payments. Once the guarantee is invoked and fund is received from the government, the cash collateral is again replenished to the extent as the GoI guarantee is for the first loss up to 10%. GoI shall settle the claim within 5 working days from the date of claim.
e. The cap on purchase of 20% of standard assets or Rs.5,000 crore of assets from single NBFCs/HFCs limits credit concentration. Also, with wholesale assets not being eligible, the scheme is available only for retail focussed NBFCs.
f. In conclusion, the guarantee does not provide credit enhancement to the individual rating of pool and the pool should have minimum rating of ‘BBB+’ or equivalent prior to PCGS. For the investor bank, it offers significant benefits being over and above the comfort features of the rated pool such as cash collateral, credit collateral and/or excess interest spread.