Partial credit guarantee: Government eases rules to benefit more NBFCs 

The government on Monday extended the validity of its partial credit guarantee scheme (PCGS) 2.0 by three months to November 19 to improve liquidity for low-rated shadow lenders and enabled state-run banks to raise their AA and AA- investment sub-portfolio under this scheme by another Rs 11,250 crore.

The total facility remains unchanged at Rs 45,000 crore.

The finance ministry said AA and AA- investment sub-portfolio should not exceed 50% (instead of 25%, or Rs 11,250 crore, mandated earlier) of the total portfolio of bonds or commercial papers (CPs) purchased by public-sector banks (PSBs) under the scheme.

The PCGS 2.0 covers borrowings, such as primary issuance of bonds/commercial papers of shadow lenders, wherein the government will bear the first 20% of loss.

The government has said AA-rated papers and below, including unrated papers, will be eligible for investment. It will cover NFBCs, housing finance companies and micro-finance institutions.

The ministry said the latest decisions were made, “keeping in view the progress under the scheme and the fact that the stipulated limit for AA/AA- rated bonds/CPs has been nearly reached while the appetite for lower rated bonds/CPs is nearing saturation considering their lower ticket size”.

Under the PCGS 2.0, PSBs have approved purchase of bonds and CPs (rated AA/AA-) issued by 28 entities and such papers rated below AA- issued by 62 entities worth a total of Rs 21,262 crore. “The average ticket size of Bonds/CPs rated below AA- is significantly lower than the average ticket size of Bonds/CPs rated AA/AA-,” the ministry said. Separately, under the special liquidity scheme of Rs 30,000 crore, proposals of Rs 7,464 crore have so far been approved.

The Partial Credit Guarantee Scheme 2.0 was launched as part of the government’s Rs 21-lakh crore relief package in May. Separately, the government had announced the special liquidity scheme for the purchase of CPs and non-convertible debentures issued by NBFCs and housing finance companies with a residual maturity of up to three months. This could be extended for a further period of up to 3 months, of a total value not exceeding Rs 30,000 crore.

The decisions were aimed at helping NBFCs, hit hard by the Covid-19 crisis, tackle their temporary liquidity mismatch and also enable them to continue to lend and aid last-mile financing. The risk aversion of investors to low-rated NBFC and MFI firms has only intensified in recent months, which was reflected in the fact that banks only accepted half the money provided by the central bank under the first tranche of the targeted long term repo operations 2.0.