The guarantee scheme was one of the provisions prescribed in the Budget for 2019-20 to ease the flow of bank credit to NBFCs and counter risk aversion by banks while lending to them.
More than a month since the central bank issued guidelines for the partial credit enhancement (PCE) guarantee scheme for non-bank lenders, not a single deal has been cut, as banks and non-banking financial companies (NBFCs) remain in the dark about nitty-gritties. The scheme is set to expire in February 2020 and banks and NBFCs have been asking the Reserve Bank of India (RBI) for further clarifications on it. The guarantee scheme was one of the provisions prescribed in the Budget for 2019-20 to ease the flow of bank credit to NBFCs and counter risk aversion by banks while lending to them.
The NBFC sector ran into a liquidity crisis after entities from the Infrastructure Leasing & Financial Services (IL&FS) group defaulted in 2018. Following that, the guarantee scheme was devised.
So far, the scheme has not gained traction as there are too many unanswered questions about it. Whether portfolios can be bought and sold under the PCE scheme without an actual valuation exercise, how risk weights of portfolios will be determined, how to account for the NBFC’s right to buy back the portfolio after a year and the tax implications of such deals are some of the questions weighing on the minds of industry players.
Typically, whenever banks buy loan pools from NBFCs, they do it on a direct assignment basis. In other words, loans sit directly on the bank’s loan book and there is no process to value the portfolio.
PK Gupta, managing director – retail & digital banking, State Bank of India, said: “In direct assignment, you only have to agree upon the interest rate at which the deal happens. So you don’t really value the entire book. The question here is whether you can still do the deal with no exchange of the real valuation happening, but on the interest-rate basis itself if the deals can be done.” He was speaking at an event organised by Edelweiss Financial Services and Indian Securitization Foundation.
Gupta explained that the call option which is available with the NBFC after one year further complicates the matter. The seller NBFC will have the option to buy back the portfolio one year from the date of sale. While such an option can easily be exercised when the portfolio duration is up to three-four years, it could be impractical to apply it to home loan portfolios with durations of up to 30 years. “That means that the call option lasts for the entire period of the remaining loan also,” Gupta said.
Another banker said there must be more clarity on how to determine risk weights for the portfolio acquired under the PCE scheme. “Will it be the prescribed risk weight for the particular nature of the pool or will there be some reduction in the risk weight because the guarantee has been applied to it?” he said. The RBI must also detail further how will credit losses be shared between banks and NBFCs in the event of a default, some NBFCs said. Kailash Baheti, chief financial officer, Magma Fincorp, said: “There has been a suggestion that for the 0-90-day period, the credit enhancement should be dipped into and if the default is past 90 days, then the government provides full compensation. That should be a good solution.”
Industry executives expect clarifications to emerge within the next one month. Deepak Mittal, CEO – credit, Edelweiss Group, said, “My personal expectation is the PCE should become clearer in 15-30 days. Sometime in October-November, deals should start happening.”