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Govt expands scope of partial credit guarantee scheme

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The finance ministry on Monday said that it has expanded the scope of the partial credit guarantee scheme (PCGS) to provide greater flexibility to state-owned banks in purchasing bonds, commercial papers of non-bank lenders.

The government had announced PCGS in July, 2019, which allowed public sector banks to purchase high-rated pooled assets from financially sound non-banking financial companies (NBFCs) and housing finance companies (HFCs). As a part of the Aatma Nirbhar package, finance minister Nirmala Sitharaman in May extended the scheme to cover primary market issuance of bonds by NBFCs, HFCs and micro finance institutions (MFIs) with low credit rating. The idea was to provide liquidity support to institutions with low credit rating and ensure continuity of credit support to small businesses as they are worst hit by the outbreak of covid-19.

Under PCGS 2.0, the government provides 20% first loss sovereign guarantee to PSBs, which will result in total liquidity infusion worth 45,000 crore to the system. The scheme covers papers with ratings of AA and below, including unrated papers, aimed at providing access 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 has now said it is now being extended to 50% as the 25% ceiling for AA/AA- rated bonds and CPs is almost met, while the appetite for lower rated ones is inching towards saturation, considering its lower ticket size.

“At the portfolio level, AA and AA- investment sub-portfolio under the scheme should not exceed 50% (instead of 25% stipulated earlier) of the total portfolio of Bonds/ CPs purchased by PSBs under the scheme,” an official statement said.

Banks have approved purchase of high rated debt instruments issued by 28 entities and that of those rated below AA- issued by 62 entities, amounting to a total of Rs. 21,262 crore. “The average ticket size of Bonds/CPs rated below AA- is significantly lower than the average ticket size of Bonds/CPs rated AA/AA-,” it said.

“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 sized NBFCs. The government needs to expand the scope of PCGS 2.0, so as to extend the guarantee cover to terms loans of banks and financial institutions given to NBFCs. As per data shared by the government, less than 100 non-bank lenders have been covered under the scheme. Majority of small and medium NBFCs turn to terms loans, instead of raising funds via bonds or commercial papers,” Raman Aggarwal, President, Delhi Hire Purchase & Leasing Cos. Association said.

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