Partial Credit Guarantee Scheme (PCGS 2.0) : Hits and Misses

PCGS 2.0 : Hits & Misses !

Finance Minister, Nirmala Sitharaman last week, as part of Covid Relief Atmanirbhar package had announced Partial Credit Guarantee Scheme 2.0 (PCGS 2.0) for Micro Finance Institutions (MFIs) and Non- Banking Financial Companies. The stated objective of the scheme is “to address temporary liquidity/cashflow mismatches of otherwise solvent NBFCs/HFCs/MFIs without having to resort to distress sale of their assets for meeting their commitments, and to enable availability of additional liquidity to them for on lending”.

ISF in an article published on 6th May(a week before the scheme announcement) had highlighted the urgent need for such a scheme – the article can be accessed here.

With the details of the scheme getting announced, we have below analysed the value the scheme may offer to the lenders and borrowers.

Hits:

  • Portfolio level guarantee: The scheme provides guarantee to the lenders at a portfolio level (and not at instrument level) for NCDs/CPs which will significantly reduce the risks for the lenders thereby making the scheme attractive.
  • Reasonable Tenor: Unlike the liquidity scheme which proposes an absurd tenor of three months, the PCGS 2.0 has provided financing of upto two years for the NBFCs/MFIs.
  • Limited to Primary Transactions: The scheme has been limited to primary transactions which will enable flow of incremental capital to the sectors.
  • Single Entity and Rating Wise Limits: Under TLTRO it was observed that few large PSU/AAA rated entities absorbed most of the capital that was provided to banks. Under PCGS 2.0 however –
    • Single entity limit has been capped to 1.25 times of that entity’s maturing liability over a period of six months from the date of issue of Bonds/CPs.
    • At the portfolio level of banks the total percentage investment in AA and AA- rated instruments cannot cross 25%.
    • Government owned entities have also been excluded from the scheme.

These things should ensure that capital flows to mid-sized and small entities as well.

  • Lastly, the eligibility conditions for NBFCs has been kept fairly broad – even loss making and unrated entities are eligible for the scheme.

Misses:

  • The maximum guarantee percentage for pool buyouts has been kept at ten percent – this ideally should have been at par with maximum guarantee percentage available for bonds/CPs i.e. 20%.
  • While AAA rated entities have been excluded from issuing bonds/CPs under the scheme, pool buyouts from these entities is not restricted. This loophole may be utilised by lenders to again take exposures to AAA rated entities.
  • For strange reasons, both TLTRO and PCG schemes have not covered term loans and have been restricted to bonds/CPs. This reduces the viability for the banks since term loan exposures additionally provide Priority Sector Lending benefits to the banks which NCDs/CPs don’t.  
  • The scheme has been limited to Public Sector Banks since sovereign guarantee cannot be extended to private entities. PSU banks have much lower capital adequacies than private banks which may act as a constraining factor. The scheme could have been easily extended to private sector entities as well by setting up a special purpose entity to offer guarantee (similar to CGTSME which provides guarantees to even NBFCs).
  • Lastly, the government has proposed maximum tenor of one year for unrated entities. However, present RBI guidelines require a minimum rating of A3 for entities to be able to issue CPs. Thus either government will need to extend the tenor for the unrated entities or RBI will need to make suitable modifications to Commercial Paper and Money Market Instrument Guidelines.

Overall the scheme should ideally appeal to the lenders and if they go by the script of the Government, incremental credit should flow to mid/small sized NBFCs/MFIs.

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