Money & Banking

Partial Credit Guarantee: NBFCs seek changes in credit rating requirements

KR Srivats New Delhi | Updated on September 19, 2019 Published on September 19, 2019

FIDC says AA rating requirement should be made applicable only after partial credit guarantee by the government

The Finance Industry Development Council (FIDC), a representative body of NBFCs, has suggested that the minimum credit rating of AA stipulated for NBFC pool of assets to be eligible for government-announced partial credit guarantee scheme needs to be revised.

The requirement of AA credit rating should be applicable post the partial credit guarantee by the government, Raman Aggarwal, Chairman, FIDC, said in a letter to Finance Secretary Rajiv Kumar.

This requirement of the NBFC pool of assets to have minimum credit rating of AA or equivalent prior to the credit guarantee by the government would reduce the impact significantly, said Aggarwal.

“Needless to say, any pool of assets having a credit rating of AA and above is anyway easily purchased by banks even without any credit guarantee,” the FIDC Chairman said.

External credit rating

Also, in the prevailing scenario of liquidity crisis, obtaining such a high-grade credit rating itself is a big challenge, inspite of the financial performance. Some of the recent events have also raised a question mark on the dependence on external credit rating, according to Aggarwal.

Meanwhile, FIDC has also sought clarity on whether the minimum credit rating of ‘AA’ stipulated in the scheme would include ‘AA-’.

It may be recalled that the Finance Ministry had, in August this year, released a scheme to operationalise the Budget announcement of a partial credit guarantee facility for public sector banks worth ₹1-lakh crore for the purchase of high-rated pooled assets of financially-sound non-banking financial companies (NBFCs) and housing finance companies (HFCs).

The objective of this one-time facility, which will be open for six months or till such date that assets worth ₹1-lakh crore are purchased by banks, whichever is earlier, is to address temporary asset-liability mismatches of otherwise solvent NBFCs/HFCs without resorting to distress sale of their assets to meet commitments. The partial credit guarantee was to cover the first loss of up to 10 per cent.

Holding period

FIDC has also suggested that all loans originated till the time this scheme (partial credit guarantee scheme) remains effective should be eligible, and that a minimum holding period of three months may be prescribed.

The scheme currently stipulates that it will be applicable only in the case of loans originated by NBFCs up to March 31, 2019. This has restricted the scope significantly, according to FIDC. As per the prevailing RBI guidelines on securitisation (which are also applicable for direct assignments), a minimum holding period of six months is required in the case of loans having original maturity of two years and above.

With this scheme kicking in from August, loans originated by NBFCs up to February 2019 (six months before the Partial Credit Guarantee Scheme was enforced) were eligible for direct assignment to banks, the FIDC letter said.

“In a tight liquidity scenario, a major chunk of such loans (originated up to February 2019) were already assigned or securitised before the Credit Guarantee Scheme came into effect. Thus, only the loans originated by NBFCs during the month of March 2019 are available under this scheme,” said Aggarwal.

FIDC has also suggested that the government should introduce a refinance mechanism for NBFCs as is available for housing finance companies.

“Now that the regulatory function of National Housing Bank has been transferred to the RBI, NHB may now become the apex refinancing body for the entire NBFC sector and not only HFCs,” said Aggarwal.

Published on September 19, 2019
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