The Finance Industry Development Council (FIDC), a representative body of assets and loan financing NBFCs, has suggested several changes to the Extended Partial Credit Guarantee Scheme (EPCGS), which was announced as a part of the support measures for NBFCs under the ₹20 lakh crore Aatmanirbhar Bharat stimulus package.
The suggestions, which were made to Finance Minister Nirmala Sitharaman through a video conference on Friday, include allowing the tenure of the term loans and bonds eligible under EPCGS to be up to four years, Raman Aggarwal, Co-Chairman, FIDC, told BusinessLine in New Delhi. A case was also made for EPCGS in case of purchase of pools to be co-terminus with the tenure of pool receivables, he said.
As per the current EPCGS guidelines, the guarantee is valid only for 24 months in case of purchase of pools, whereas the average pool tenure itself is 3-5 years for retail portfolio that includes automobiles, equipment and mortgage loans.
In the case of purchase of bonds, the tenure of the bonds eligible for purchase is 9 to 18 months (up to 12 months in case of unrated bonds). This will create asset liability mismatch, since NBFCs lend for 3 years on an average, FIDC has said.
Extension of scheme from 2019
The EPCGS or PCGS 2.0 is an extension of the December 2019 scheme that offered government guarantee to public sector banks for purchasing pooled assets with a rating of BBB+ or above, from financially sound NBFCs/Housing Finance Companies (HFCs), with the amount of overall guarantee being limited to first loss of up to 10 per cent of fair value of assets being purchased by the bank under the scheme or ₹10,000 crore, whichever is lower.
On the other hand, PCGS 2.0 provides portfolio guarantee for the first loss of up to 20 per cent for purchase by PSBs of bonds or commercial papers with a rating of AA and below (including unrated paper) issued by NBFCs, HFCs or micro-finance institutions (MFIs).
While the original PCGS supported transfer of assets from NBFCs/HFCs to PSBs, the extended scheme addresses temporary liquidity/cash flow mismatches of otherwise solvent NBFCs/ HFCs/MFIs without having to resort to distress sale of their assets to meet their commitments.
Constant dialogue
FIDC has also suggested to the Finance Minister and senior Finance Ministry officials on Friday that there should be an institutional mechanism for interaction between NBFCs and the Department of Financial Services (DFS) every quarter or six months, Aggarwal said.
Till date, no such mechanism exists, although the nation’s NBFC sector is relatively big and deserved more attention of policy makers.
Another FIDC suggestion is that the liquidity support and EPCGS measures should be over and above the current banking limits.
These facilities should not be used by banks to reduce their outstanding exposure on the NBFC customers, FIDC has suggested.
Some banks including SBI have passed a policy last week to reduce the existing limits of their NBFC customers by an equivalent amount they are sanctioning under pool purchase, Aggarwal said. This does not improve liquidity, according to FIDC.