Banks to get two-year guarantee to purchase 'pooled assets' of NBFCs

The Union government on Tuesday announced a scheme for providing a one-time credit guarantee to public sector banks (PSBs) for purchase of pooled non-banking financial companies’ (NBFC) assets. 

Under the scheme, notified on August 10, public sector banks (PSBs) have been given a deadline of six months to purchase “pooled assets” of NBFCs at fair value. “One-time guarantee provided by the government on the pooled assets will be valid for 24 months from the date of purchase and can be invoked on the occurrence of default,” according to the notification.

This follows a Union Budget announcement made by Finance Minister Nirmala Sitharaman that the government will provide a one-time partial credit guarantee to PSBs for first loss of up to 10 per cent for purchase of high-rate pooled assets of NBFCs totaling Rs 1 trillion.  The government has laid down “stringent” criteria for eligibility of NBFCs and housing finance companies (HFCs) to become a part of the scheme and offer their assets for sale to banks. The NBFCs or HFCs should have made a net profit in any of the last two financial years, that is 2017-18 and 2018-19, and their net-performing assets should not be more than 6 per cent till March 31, 2019, the scheme said. 

Additionally, the NBFCs or HFCs should not have been reported under the Special Mention Accounts category by any bank for their borrowings “during last one year prior to August 1, 2018”. 

Lenders categorise accounts as SMA when the money borrowed remains outstanding for 30-90 days after the due date of payment.  Further, the capital to risk (weighted) assets ratio (CRAR) should not be below the regulatory requirement of 15 per cent for NBFCs and 12 per cent for HFCs as of March 31, 2019.  “The move will empower banks to take a decision in purchasing pooled assets of NBFCs. It is not a bailout to any NBFC as the conditions have been made stringent and it will help solvent NBFCs to solve their temporary asset liability mismatches,” a senior finance ministry official said, requesting anonymity. 

The government has allowed the NBFCs and HFCs to buy back their assets “after a specified period of 12 months” as a repurchase transaction, on a right of first refusal basis. 

The pool of assets should have a minimum rating of ‘AA’, through credit rating agencies accredited by the Reserve Bank of India, before partial credit guarantee is given by the government. 

To begin with, NBFCs will be allowed to sell up to a maximum of 20 per cent of their standard assets as of March 31, 2019 “subject to a cap of Rs 5,000 crore at fair value”.  However, the NBFCs won’t be allowed to sell revolving credit facilities, assets purchased from other entities and assets with “bullet repayment of both principal and interest” to banks under this scheme.  The government will not bear the loss for assets in case they are brought back by the NBFCs or sold by the bank to other entities, the notification stated.