The details released on Thursday of that extended partial credit guarantee scheme (PCGS 2.0) shows that the government will provide guarantees worth Rs 10,000 crore, and this includes both purchase of pooled assets and purchase of bonds. Which means the government has reduced the total portfolio size to Rs 50,000 crore, experts say. This also makes sense as banks anyway had not bought NBFC bonds worth more than Rs 10,000 crore.
The guarantee would be available both for buying pooled assets of NBFCs
rated BBB+ and above, and for buying bonds and commercial papers of NBFCs
rated AA and below. The guarantee will be for one time and will remain open for banks to avail till 31 March, 2021, a government notification said.
In case of asset purchases, the guarantee is valid for two years from the date of purchase of the assets, and for bonds and commercial papers, the guarantee ends with the end of tenure. Importantly, this is a one time guarantee. The assets have to be standard in the books of the NBFCs, with a clear repayment history of six months.
Experts are not very hopeful the latest measures would also be received with much enthusiam among banks.
“In PCGS 1 the volumes remained limited, and the response that way was not very good. In a scenario, when asset quality could come under pressure in the underlying retail borrowers, the appetite for pools buyouts may remain weak, said Anil Gupta, VP and Sector Head, ICRA.
”From the side of bond purchase, bonds can be issued up to 18 months with the guarantee of up to 20 per cent in case of default. However, If there is a default by an NBFC on these bonds, the loss on the default could be higher than 20 per cent. So, this 20 per cent protection in case of loss may not solely incentivize banks to invest in the NCDs,” Gupta added.
As per the government scheme, the assets to be purchased by banks should be rated by credit rating agencies. The one time guarantee of 24 months will expire if the bank sells the portfolio to others. The NBFCs or HFCs
will have the right to buy back their assets after 12 months.
On the bond buying scheme, the government said the AA and below portfolio should be just 25 per cent or below in the total portfolio under the credit guarantee scheme. A public sector bank can buy up to 20 per cent of its non-government bond portfolio through this route.
Importantly, banks will have three months time to come up with the details of purchases.
The guarantee would be available both for buying pooled assets of NBFCs rated BBB+ and above, and for buying bonds and commercial papers of NBFCs rated AA and below. The guarantee will be for one time and will remain open for banks to avail till 31 March, 2021, a government notification said.
In case of asset purchases, the guarantee is valid upto March 31, 2021 , and for bonds and commercial papers, the guarantee ends with the end of tenure. Importantly, this is a one time guarantee. The assets have to be standard in the books of the NBFCs, with a clear repayment history of six months.
“The PCGS 2.0 will be more effective than the earlier one. But, the 20 per cent first loss should be at a portfolio level and not at the issuer level because the scheme is for the portfolio. If you give guarantee at an issuer level then there won’t be any takers from the banker’s side,” said Nirmal Jain, Chairman of IIFL Group.
“Also, given that the earlier scheme has been given an extension so there will be better response this time. The special liquidity scheme for three months is too short a time period. And, if there is a 100 per cent government guarantee, why are secondary purchases being allowed from the market because that is not giving liquidity to NBFCs but it is providing an exit to investors who had taken a commercial call some years ago. so, it should be for primary issuance,” Jain said.
The government’s direct purchase scheme announced on Wednesday showed that a special purpose vehicle will buy the loans, and not the government directly. However, those purchases would only be for existing bonds maturing within three months.
The PCGS 2.0 is just an extension of PCGS 1.0 in its scope as it covers first loss to the extent of 20% for pool buy out as well as purchase of bonds and CPs with maturity upto one year issued by NBFC, HFC and MFI.
“The liquidity measure of Rs 30,000 crore for NBFCs appears not very useful as guarantee is only for short period of three months so NBFCs facing liquidity pressure to honor liability can breathe for three month,” said the CEO of a housing finance company.
Alternatively, NBFCs can draw this money, create loan assets in less than three months to issue bond under PCGS and pay this short term money.
“In present scenario creating loan assets and then substituting with one year money under PCGS is challenging. Government should have ideally thought for providing durable liquidity of at least three years,” the HFC ceo said, requesting anonymity.
Prakash Agarwal, Director & Head, India Ratings, said, in capital market instruments either your recovery will be full or nil, it cannot be that you recover 60-70 per cent. So, the PCGS 2.0 will achieve a very limited objective.