The partial credit guarantee scheme launched three months ago by the center to increase the flow of funds to non banking financial companies remains a non-starter with risk-averse banks hesitating to take the lead and the NBFCs unsure of who would bear the cost, said three people familiar with the state of the scheme.
Lack of clarity on whether to treat the transactions between the banks and NBFCs as ‘securitisation’ deals or as ‘pass-through certificates’ (PTC) is also impending any movement, given that these have accounting implications. While ‘securitisation’ allows the entire profit to be booked upfront, in a PTC the profits must be booked over the tenor of the loan.
After the scheme was announced in July budget and rules framed in August, many proposals had been discussed between the operating agency – Small Industries Development Bank of India (SIDBI) – the commercial banks and NBFCs. However, hardly any transaction had been finalised so far, said the sources.
“We haven’t done any deal,” said head of a state run bank. “The guarantee covers the risk of default for only the first two years. What if there’s a default after that?”
Industry players pointed out that most long-term loan encounter troubles much later.
The promoter of an NBFC said about Rs. 40,000 crore has been sanctioned by banks, but that very little has been disbursed.
While the banks are lobbying that the premium for the guarantee must be paid by NBFC, the latter want banks to bear the cost. Nearly 0.25% of the loan amount has been paid as premium to avail the scheme.
The department of financial services had, on August 10, asked SIDBI to evaluate the proposals from banks and execute the guarantees. SIDBI was also asked to keep a record of transactions and determine headroom for guarantee, carry out carry out examination of claims and monitor recoveries in accounts for which guarantee has been executed, a senior SIDBI official said.
SIDBI has setup a separate vertical – the MSME Ecosystem Development and Coordination Vertical (MEDCV) – to implement the scheme. “A system of expeditious evaluation of proposals received from public sector banks has been put in place,” said the SIDBI official.
While the official claimed the scheme has been formally implemented from the date of issue of guidelines, NBFC executives denied any such development.
“We have not yet got any clarity on government guarantee part; SIDBI too is not fully clear about it. We think formal implementation has not been exercised,” said the head of the NBFC.
“There seems to be a fair amount of confusion, especially on who must pay the premium for guarantee and how it must be paid. And is take the 10% loss guarantee in its current form, it’s too expensive for banks to subscribe to,” said the CEO of a large NBFC. “While a few banks have given out sanctions so that it appears the wheels are moving, disbursals have not happened.”
Finance Minister Nirmala Sitharaman had on August 10 launched the Rs 1 lakh crore partial credit guarantee scheme, under which the public sector banks would buy high-rated pooled assets of financially sound NBFCs, including housing finance companies. The scheme was first announced in the July 5, and the rules were framed thereafter. Under the scheme, the government will provide a one-time, six month partial credit guarantee to public sector banks for the first loss of up to 10%.
The scheme came in the wake of tight liquidity conditions being faced by NBFCs after the collapse of Infrastructure Leasing & Financial Services last year and the mounting troubles of Dewan Housing Finance Corp Ltd. Many other financial companies were shunned by investors because of asset-liability mismatch.