Cabinet okays credit guarantee scheme for NBFCs

The Union Cabinet Wednesday allowed the Centre to partially guarantee the state-owned banks' purchase of Rs 1-lakh crore of performing assets of non-banking finance companies in order to address their temporary cash flow mismatch issue.

Under the scheme, the government will provide a one-time partial credit guarantee to the state-owned banks that would buy the BBB+ rated securities of the financially sound NBFCs, including housing finance companies.

This guarantee will be for the first loss up to 10% of fair value of assets being purchased by them under the scheme or Rs 10,000 crore, whichever is lower.

The move, which was announced in the Union Budget 2019-20, will provide ample liquidity to NBFCs to extend last-mile lending to borrowers, thereby spurring economic growth. NBFCs are the major lenders to home, auto and retail loans in the country. However, the liquidity crunch faced by them immediately after the IL&FS crisis has hurt consumption growth in sectors like automobiles and housing, affecting manufacturing.

“The window for one-time partial credit guarantee will remain open till June 30, 2020, or till such date by which Rs 1,00,000 crore assets get purchased by the banks, whichever is earlier. Power has been delegated to the finance minister to extend the validity of the scheme by up to three months taking into account its progress,” an official statement issued after the Cabinet meeting said.

The scheme will also cover NBFCs and HFCs that might have slipped into the “SMA-0” category during the one-year period prior to August 1, 2018, and asset pools rated “BBB+” or higher.

SMA-0 is a category in which both the principal and interest have remained outstanding for a period of 30 days after the payment due date and there can be some incipient stress with the loan account.

The Cabinet also approved the Insolvency and Bankruptcy Code (Second Amendment) Bill, aimed at removing bottlenecks and streamlining the insolvency resolution process. The move is expected to boost investment in financially distressed sectors.

The bill allows ring-fencing of corporate debtor resolved under the IBC in favour of a successful resolution applicant from criminal proceedings against offenses committed by previous management/ promoters.

The cabinet also approved the proposal for providing additional equity support to IIFCL to the tune of Rs. 5,300 crore in the financial year 2019-20 and Rs 10,000 crore in the financial year 2020-21.

This will be done through regular budgetary support and issuance of recapitalization bonds. The Cabinet has also approved for increasing the authorized capital of IIFCL from Rs 6,000 crore to Rs 25,000 crore.

This will enable IIFCL to create requisite headroom for borrowing, thus enabling it to finance big-ticket infrastructure projects in line with the Centre's target to invest Rs 100 lakh crore in the infrastructure sector over the next five years.

IIFCL, a wholly-owned government company set up in 2006, is the principal entity that provides long term finance to viable infrastructure projects across sectors.It is a non-banking finance company - infrastructure finance company (NBFC-IFC) registered with RBI since September 2013.