The Union Finance Ministry has followed through the announcement in the budget and issued detailed guidelines on how the public sector banks can avail the partial guarantee from the government for buying the assets of NBFCs.
The government’s partial guarantee will cover a maximum asset value of Rs 1 trillion and the NBFCs whose assets are being purchased by the banks will contribute 0.25% to the government towards providing this guarantee. The key takeaways from the guidelines are as below:
- The aim is to help NBFCs, which are otherwise solvent but have as asset liability mismatch; these companies need not be driven to distress-selling of their assets to meet their liabilities; public sector banks will take over their assets. This should help in restoring the balance in the Asset Liability Management and move them into positive territory. The larger objective is to make the NBFC sector vibrant again capable of lending to the deserving borrowers and boost the purchasing cycle at the consumer end.
- Care should be taken to ensure that the CRAR (capital to risk weighted assets ratio) does not go below the minimum stipulated in each case. Where such situations exist the promoters of the NBFCs will have to inject their own funds in the form of equity to ensure the minimum levels are not compromised. The CRAR levels are 15% for NBFCs and 12% for the housing finance companies (HFCs).
- The government is keeping this partial guarantee window open for a period of six months or till such time the Rs 1 lakh crore target is reached by the banks, whichever is earlier.
- Assets originated up to March 31, 2019 will only be eligible under this scheme, it said, adding assets should be standard in the books of NBFCs/HFCs on the date of sale.
- The credit rating of the assets should be at least AA or above. Assets below that rating will not qualify under this guarantee.
- The guidelines stipulate that a single NBFC can at best liquidate 20% of its assets which otherwise qualify as above subject to a maximum ticket value of Rs 5,000 crore. The words ‘fair value’ has been added to this clause.
- In terms of the duration of the guarantee, the guidelines stipulate that it will be 24 months unless the NBFC buys the assets back from the bank or the bank manages to sell them to a third party.
- The banks will have to enter into an agreement with the NBFC for the servicing of the asset though it may be with the bank.
- The buyback option is available for the NBFCs on a right of first refusal basis, after a specified period of 12 months from the date of purchase by the bank from the originating NBFC.
- In terms of which NBFC or HFC (housing finance companies) will be eligible for this partial guarantee offer, it is simple, the NBFCs have to be registered with the RBI while the HFCs should be on the list with the National Housing Bank. Their net NPAs must not exceed 6% as on March 31, 2019.
- The banks can consider an asset a default if there is no payment forthcoming for a period of 90 days.
The government has also stipulated certain norms for generating periodical reports on the transactions and the Department of Financial Services within the Finance Ministry will be nodal authority to monitor the entire issue.