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The Union finance ministry said on Monday that it had expanded the scope of the partial credit guarantee scheme (PCGS) to provide greater flexibility to state-owned banks in purchasing bonds and commercial papers of non-banking financial companies (NBFCs).
The Centre had announced the PCGS in July 2019, allowing public sector banks to purchase high-rated pooled assets from financially sound NBFCs and housing finance companies (HFCs). As a part of its Aatmanirbhar initiative, finance minister Nirmala Sitharaman had extended the scheme in May to cover primary market issuance of bonds by NBFCs, HFCs and micro finance institutions (MFIs) with low credit ratings. The idea was to provide liquidity support to institutions with low credit ratings and ensure continuity of credit support to small businesses, which were the worst hit during the covid-19 outbreak.
Under PCGS 2.0, the Centre provided 20% first loss sovereign guarantee to public sector banks, resulting in liquidity infusion of ₹45,000 crore into the system. The scheme covered papers with ratings of AA and below, including unrated papers, aimed at providing access to fresh liquidity support to non-bank lenders.
The maximum headroom permissible for purchase of bonds and CPs rated AA/AA- was a fourth of the total portfolio at ₹11,250 crore. The ministry said this will be extended to 50%, as the 25% ceiling for AA/AA- rated bonds and CPs was nearly met, while the appetite for low-rated papers is inching towards saturation, considering its lower ticket size.
“This is a step towards increased funding for bigger NBFCs which have higher rating, while the actual objective was to provide greater funding to small and medium NBFCs. The government needs to expand the scope so as to extend the guarantee cover to term loans of banks and financial institutions given to NBFCs. Less than 100 NBFCs have been covered under the scheme. A majority of small and medium NBFCs turn to term loans, instead of raising funds via bonds or CPs,” said Raman Aggarwal, president, Delhi Hire Purchase & Leasing Cos. Association.
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