The Indian Government has recently published guidelines and regulations associated with the Rs. 1 lakh crore Partial Guarantee Scheme. This scheme is formulated with an aim to deal with the liquidity crisis brewing in Non-Banking Financial Companies (NBFC). Under this scheme, public sector banks can purchase securities from financially stable NBFCs, provided the securities have at least ‘AA’ rating.
The Objective of the Partial Guarantee Scheme
The main objective of introducing this scheme is to resolve temporary asset-liability mismatches that are appearing in otherwise solvent NBFCs/Housing finance companies (HFCs). The scheme provides a way out for these institutions so they won’t have to resort to distress sale of their assets in order to meet their commitments.
The recent IL&FS crisis had significant implications on NBFCs/HFCs as it brought about financial stress in these organizations. To mitigate the crisis, the government proposes to provide a one-time, six months’ partial credit guarantee to public sector banks for first loss of up to 10%.
Moreover, certain mandates also apply to these NBFCs/HFCs. For instance, in the course of exercising the option to buy back the assets, the CRAR (capital to risk-weighted assets ratio) shall not go below the regulatory minimum.
What is Capital Adequacy Ratio (CAR)?
Capital Adequacy Ratio (CAR) is a vital measure of a bank’s available capital, expressed as a percentage of a bank’s risk-weighted credit exposures. CAR, also known as capital-to-risk-weighted assets ratio (CRAR), plays an instrumental role in protecting depositors. Furthermore, it promotes the stability and efficiency of financial systems around the world.
Understanding NBFC-Related Facts in Brief
Before delving into further details, let us understand some facts related to NBFC in the form of a table. These facts can provide better clarity about the scenario and context:
| Fact | Details |
|---|---|
| NBFC Crisis Origin | The recent IL&FS crisis has created financial stress in Non-Banking Financial Companies (NBFC) and Housing Finance Companies (HFC). |
| Proposed Solution | The government proposed the Rs. 1 lakh crore Partial Guarantee Scheme to handle the asset-liability mismatches. |
| What is CAR? | The Capital Adequacy Ratio (CAR), also known as CRAR, is a measure of a bank’s available capital against its risk-weighted credit exposures. |
Final Thoughts on the Partial Guarantee Scheme
The Rs. 1 lakh crore Partial Guarantee Scheme has been consciously designed to counterbalance the financial instability plaguing NBFCs/HFCs. By allowing public sector banks to buy securities from these institutions, a new avenue of financial sustenance is being provided. The temporary mismatch between assets and liabilities, which has become characteristic of these firms can be potentially rectified if this scheme goes as planned.
Moreover, by setting mandates like ensuring the CRAR does not go below the regulatory limit during the buyback of assets, the scheme also reinforces adherence with regulations. The partial credit support offered to public sector banks is another evidence of the government’s proactive approach to tackle the crisis.