Government issues guidelines for partial guarantee scheme of Rs 1-lakh cr for NBFC

New Delhi, August 13 () The Center has issued guidelines on the implementation of the partial guarantee scheme of Rs 1-lakh crore under which public sector banks can purchase high-rated grouped assets from non-bank financial companies (NBFC) financially sound.

The NBFCs, including housing finance companies (HFCs), suffered stress after a series of breaches by the companies in the ILu0026FS group in September last year.

To help the sector get out of stress, Finance Minister Nirmala Sitharaman in the Budget announced its support for the fundamentally sound NBFCs to obtain continuous financing from banks.

For the purchase of financially sound NBFC high-grade pooled assets, which total Rs 1 lakh crore during the current fiscal year, the government will provide a six-month partial credit guarantee to public sector banks for the first loss of up to 10 percent, he had said.

In compliance with this, the Ministry of Finance published last week a detailed guide for this with the objective of addressing the temporary mismatches of solvent NBFC/HFC assets without having to resort to the sale of its assets to meet its commitments .

The partial guarantee would help to rework the Asset Responsibility structure within three months to have a positive Asset Responsibility Management in each segment during the first three months and cumulatively during the remaining period.

At no time during the exercise period of the option to repurchase the assets, if the CRAR (capital ratio/weighted risk of assets) falls below the regulatory minimum. The promoter will ensure this by infusing capital, when necessary, an official said. statement said.

According to the guidelines issued, the window for the one-time partial credit guarantee will be for a period of six months, or until the date on which the banks purchase the assets of Rs 1 lakh crore.

Assets originating until March 31, 2019 will only be eligible under this scheme, he said, adding that the assets must be standard in the NBFC/HFC books on the sale date.

In addition, he said that the set of assets must have a minimum rating of 'AA' or fair value equivalent before the partial credit guarantee by the Government of India.

Each account under the pooled assets should have been fully disbursed and a security charge should have been created in favor of the original NBFC/HFCs and may sell up to 20 percent of its standard assets as of March 31, 2019 subject to a cap of Rs 5,000 crore at fair value.

In accordance with the guidelines, qualified assets will be acquired by the banks at their fair value.

The single guarantee granted by the government on the grouped assets will be valid for 24 months from the date of purchase and can be invoked in case of default, as described in the heading 'D' below, he said.

The guarantee will cease before if the buying bank sells the grouped assets to the NBFC/HFC of origin or any other entity, before the validity of the guarantee period, he added.

In addition, he said that buyer banks may have service level agreements with the NBFC/HFCs of origin for the service, including the management of individual assets.

The NBFC/HFC may have the option to repurchase their assets after a specific period of 12 months as a repurchase transaction, based on the right of first rejection, he said.

Regarding the eligibility criteria, the guidelines say that NBFCs registered with RBI HFCs registered with the National Housing Bank (NHB) under the National Housing Bank can benefit under the window.

The HFC NBFC/CAR CRAR should not be below the regulatory minimum of 15 percent for NBFCs and 12 percent for HFCs and the unprofitable net asset should not exceed 6 percent at 31 March 2019

They should have made a net profit in at least one of the last two previous financial years (that is, fiscal year 2017-18 and 2018-19).

The buyer bank can invoke the guarantee if the interest and/or the principal's share remain overdue for a period of more than 90 days (that is, when the underlying borrower's responsibility crystallizes) during the validity of said guarantee, subject to the condition that the guarantee is for the first loss of up to 10 percent, he said.

To take advantage of the window, he said that the NBFC/HFC will pay a fee equivalent to 0.25 percent per annum of the fair value of the assets that the bank buys from the government to provide guarantee.

There should be a process of real-time reporting of such transactions by banks to the government and obtaining information on the remaining available margin for the purchase of such grouped assets, he said. The Department of Financial Services (DFS), the Ministry of Finance would obtain the required information in a prescribed format from the PSB and send a copy to the budget division of the DEA and the government will resolve such claims from the banks within 5 days Working as of the date of the claim. DP MKJ