From UPSC perspective, the following things are important :
Prelims level : Partial Credit Guarantee Scheme
Mains level : NPA issue
The Union Cabinet has approved a partial credit guarantee scheme for public sector banks (PSBs) to purchase high-rated pooled assets from financially sound NBFCs and housing finance companies.
What is the decision about?
- PSBs can purchase high-rated pooled assets from financially sound NBFCs/Housing Finance Companies (HFCs), with the amount of overall guarantee provided by government till the first loss of up to 10 per cent of fair value of assets being purchased by banks or Rs 10,000 crore, whichever is lower.
- The scheme would cover NBFCs / HFCs that may have slipped into SMA-0 category during the one year period prior to 1.8.2018, and asset pools rated “BBB+” or higher.
Partial Credit Guarantee Scheme
- The Union Government had issued the PCG Scheme in the Union Budget this year to provide a one-time partial credit guarantee to PSBs for purchase of pooled assets of financially sound NBFCs.
- It aims to address temporary asset liability mismatches of otherwise solvent NBFCs/HFCs without having to resort to distress sale of their assets for meeting their commitments.
- It allows PSBs to purchase pooled assets enabled by Government guarantee support under the Scheme to addressing temporary liquidity / cash flow mismatch issues of otherwise solvent NBFCs / HFCs.
- This pooling would allow NBFCs without them having to resort to distress sale of their assets for meeting their commitments.
- This will provide liquidity to the NBFC / HFC concerned for financing the credit demand of the economy, and also protect the financial system of the country from any adverse contagion effect that may arise due to the failure of such NBFCs / HFCs.
Validity of the scheme
- The window for one-time partial credit guarantee offered by GoI will open from the date of issuance of the Scheme by the Government for a period of six months, or till such date by which Rupees One lakh crore assets get purchased by banks, whichever is earlier.
- The proposed Guarantee support and resultant pool buyouts will help address NBFCs/HFCs resolve their temporary liquidity or cash flow mismatch issues.
- It will enable them to continue contributing to credit creation and providing last mile lending to borrowers, thereby spurring economic growth.