Cabinet approves Partial Credit Guarantee Scheme

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News:Union Cabinet has approved Partial Credit Guarantee Scheme for purchase of high-rated pooled assets from financially sound NBFCs/HFCs by Public Sector Banks(PSBs).

Facts:

About the Partial Credit Guarantee Scheme: 

  • The scheme provides for a one-time partial credit guarantee to Public sector banks(PSBs) for purchase of pooled assets of financially sound NBFCs and HFCs,
  • The scheme aims to address temporary asset liability mismatches of otherwise solvent NBFCs/HFCs without having to resort to distress sale of their assets to meet their commitments.
  • The scheme would cover NBFCs / HFCs that may have slipped into SMA-0 category and asset pools rated BBB+ or higher.
  • The validity of the scheme offered will be 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.

Significance of the scheme:

  • The scheme was launched as the NBFCs including HFCs have been under stress following the series of defaults by group companies of Infrastructure Leasing & Financial Services Ltd. (IL&FS).
  • This stress on NBFCs was seen as a key reason for a slowdown in the economy.It has also caused reduced credit flow to small businesses and consumers.
  • Hence,this scheme will help address NBFCs/HFCs resolve their temporary liquidity and enable them to continue contributing to credit creation and providing last mile lending to borrowers, thereby spurring economic growth. 

Additional information:

About Special mention accounts(SMA):

  • Special Mention Accounts are those accounts that shows symptoms of bad asset quality in the first 90 days itself.
  • The Special Mention Account identification is an effort for early stress discovery of bank loans.It was introduced as a corrective action plan to contain stress.

Categories of SMA accounts:RBI has classified such Special Mention Accounts accounts into three categories which are:

  • SMA-0 is a category in which both the principal and interest has remained outstanding for a period of 30 days after the payment due date and there can be some incipient stress with the loan account. 
  • SMA-1 is a category in which stress with respect to the principal and interest has remained overdue for a period of more than 30 days to 60 days. 
  • SMA-2 is the third category devised in order to mitigate the bad loan problem with the amount being overdue for tenure between 61 days to less than 90 days.