Two major schemes credit guarantee scheme proposed in the Union Budget and priority sector status for bank lending to NBFCs for on-lending to agriculture, small units and housing mooted by the Reserve Bank of India in the monetary policy statement were notified on Tuesday to bail out the struggling financial sector hit by a series of defaults and liquidity crunch.
Under the credit guarantee scheme, the Finance Ministry said banks can purchase rated pooled assets of financially sound NBFCs/HFCs and get a credit guarantee from the government for first loss up to 10 per cent. The scheme will be open for six months or till the time banks purchase Rs 1 lakh crore of assets from NBFCs, whichever is earlier.
As per the guidelines, banks can purchase rated assets of NBFCs at fair value. The government guarantee will be valid for 24 months and can be revoked on default. 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, the government said.
Only better performing NBFCs and HFCs can avail this facility. NBFCs/HFC having capital adequacy ratio above the regulatory minimum levels, net NPA below 6 per cent as on March 31, and having made a net profit in at least one of the last two preceding financial years, can avail this facility. Further, NBFC/HFCs should not have been reported under SMA (Special Mention Accounts) category by any bank for their borrowings during last one year prior to July 1, 2018.
Pooled assets have minimum rating of AA or equivalent and standard in the books of companies as on date of sale will be covered under the facility. 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, the government said.
NBFCs and HFCs can sell up to a maximum of 20 per cent of their standard assets as on March 31, 2019 subject to a cap of Rs 5,000 crore at fair value. The underlying assets should represent the debt obligations of a homogeneous pool of obligors and inpidual asset size in the pool is capped at Rs. 5 crore, it said.
NBFCs/HFCs will pay a fee equivalent to 0.25 per cent per annum of the fair value of assets being purchased by the bank under this scheme to the government. The scheme will be monitored by the department of financial services.
To improve fund availability to NBFCs/HFCs, Finance Minister Nirmala Sitharaman announced the credit guarantee proposal in Union Budget 2019-20.
On the other hand, in a bid to boost credit to the needy segment of borrowers , the RBI has decided to allow bank lending to registered NBFCs (other than MFIs) for on-lending to agriculture (investment credit) up to Rs 10 lakh, micro and small enterprises up to Rs 20 lakh and housing up to Rs 20 lakh per borrower (up from Rs 10 lakh at present) to be classified as priority sector lending.
Under this on-lending model, banks can classify only the fresh loans sanctioned by NBFCs out of bank borrowings, on or after the date of issue of this circular. However, loans given by HFCs under the existing on-lending guidelines will continue to be classified under priority sector by banks, the RBI said in a notification to CEOs of banks.
The RBI said bank credit to NBFCs for on-lending will be allowed up to a limit of five per cent of inpidual bank s total priority sector lending on an ongoing basis. The new on-lending limits will be valid for the current financial year up to March 31, 2020 and will be reviewed thereafter. However, loans disbursed under the on-lending model will continue to be classified under priority sector till the date of repayment/maturity, the RBI said.
The priority sector tag will provide benefits to NBFCs in terms of interest rate and other conditions for the loans. RBI Governor Shaktikanta Das announced the scheme in the monetary policy statement on August 7.
Hit by liquidity crunch and high cost of borrowings, NBFCs had sought short-term and long-term measures from the government and the Reserve Bank for survival. The financial sector had gone into a tailspin after IL&FS group defaulted last year, leading to a liquidity crunch in the sector.