Guarantee for NBFC assets: Rules framed with tough riders

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Published: August 14, 2019 12:49:41 AM

The guarantee provided by the government on the assets will be valid for 24 months from the date of purchase and can be invoked on the occurrence of default.

The NBFCs/HFCs can have the option to buy back their assets after 12 months as a repurchase transaction, on a right of first refusal basis.The NBFCs/HFCs can have the option to buy back their assets after 12 months as a repurchase transaction, on a right of first refusal basis.

The finance ministry on Tuesday notified a scheme to enable public-sector banks (PSBs) to implement a crucial Budget announcement under which the government would offer a one-time partial guarantee to the banks to buy pooled assets worth Rs 1 lakh crore of financially-sound NBFCs this fiscal. This will cover their first loss of up to 10%.

As per the scheme, the assets will be purchased by the PSBs at fair value and they must be rated by credit rating agencies accredited by the Reserve Bank of India (RBI).

The government, however, set some tough criteria for the NBFC/HFCs to get relief. The guarantee will be given for the assets of those NBFCs whose capital to risk (weighted) assets ratio was not below the minimum regulatory requirement of 15% as of March 31, 2019. Similarly, the capital adequacy of an HFC must have been 12% or above at the end of March. Their net non-performing assets should not have crossed more than 6% as of end-March.

They should have made a net profit in at least one of the last two preceding financial years (FY18 and FY19). The NBFCs/HFCs should not have been reported under SMA category by any bank for their borrowings during last one year prior to August 1, 2018.

NBFCs/HFCs will pay a fee equivalent to 0.25% a year of the fair value of assets being purchased by the bank under this scheme to the government (must be routed through the purchasing bank).

The window for the guarantee will open for a period of six months (from Tuesday), or till such date by which assets worth Rs one lakh crore get purchased by banks, whichever is earlier.

Those whose assets are sold under this scheme should rework their asset-liability structure within three months to have positive ALM in each bucket for the first three months and on cumulative basis for the remaining period. “At no time during the period for exercise of the option to buy back the assets, should the CRAR go below the regulatory minimum. The promoter shall ensure this by infusing equity, where required,” the government said.

The guarantee provided by the government on the assets will be valid for 24 months from the date of purchase and can be invoked on the occurrence of default.

The NBFCs/HFCs can have the option to buy back their assets after 12 months as a repurchase transaction, on a right of first refusal basis.

Only those NBFCs that are registered under the RBI Act, excluding those registered as micro-finance institutions and core investment companies, are eligible for the scheme. Similarly, only those HFCs registered with the National Housing Bank (NHB) are eligible.

Assets originated up to March 31 will only be eligible under this scheme and they should be standard in the books of NBFCs/HFCs on the date of sale. The pool of assets should have minimum rating of ‘AA’ or equivalent at fair value prior to the partial credit guarantee by the government.

NBFCs/HFCs can sell up to a maximum of 20% of their standard assets as of March 2019, subject to a cap of Rs 5,000 crore at fair value. “Any additional amount above the cap of Rs 5,000 crore will be considered on pro rata basis, subject to availability of headroom,” the ministry said.

The underlying assets should represent the debt obligations of a homogeneous pool of obligors and individual asset size in the pool is capped at Rs 5 crore (i.e. asset pool should be sufficiently granular).

The purchasing bank can invoke the GoI guarantee if the interest and/or instalment of principal remains overdue for a period of more than 90 days (i.e. when liability is crystalised for the underlying borrower) during the validity of such guarantee, subject to the condition that the guarantee is for the first loss up to 10%.

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