The National Bank for Agriculture and Rural Development (NABARD) has recently launched a Partial Credit Guarantee Programme for Non-Banking Financial Company (NBFC) – Micro Finance Institutions (MFIs). This initiative is designed to ensure an uninterrupted flow of credit in rural areas that have been severely impacted by the Covid-19 pandemic.
About the Programme
This programme involves NABARD providing a partial guarantee on pooled loans extended to small and mid-sized MFIs. The need for such an initiative arises from the fact that most MFIs have been excluded from the moratorium benefits provided by banks. This has caused a decrease in collections, leading to a broadening asset-liability mismatch, credit downgrades, and a surge in the cost of fresh funding.
In its initial phase, NABARD aims to facilitate Rs. 2,500 crore funding, with plans to further increase this amount. The programme is expected to benefit over 1 million households across 650 districts in 28 states.
Implementation of the Programme
For effective rollout of the initiative, NABARD has entered into agreements with Vivriti Capital and Ujjivan Small Finance Bank. Vivriti Capital itself is a non-bank financial corporation.
Benefits of the Programme
The partially guaranteed loan facility will inject much-needed financing into households, agricultural, and business markets, enabling them to withstand the challenges of the post-Covid-19 environment. It’s important to highlight that MFIs operate in rural areas, serving farmers, traders, rural businesses, and households.
Pooled Loan Issuance (PLI)
Under a PLI structure, a bank or an NBFC, referred to as the Principal Lender, provides loans to identified Microfinance Institutions/other NBFCs/corporates, which are the Borrowers. These loans are offered as per terms agreed upon between the Principal Lender and the Borrowers, in line with the Principal Lender’s underwriting and credit evaluation practices.
The issued loans are pooled together and backed by a common partial guarantee offered by identified guarantors. This PLI structure not only provides the lending bank with adequate comfort through the guarantor’s partial credit protection but also reduces the cost of capital since the rating of the loans increases, thereby helping lenders meet priority sector goals.
Non-Banking Financial Company-Micro Finance Institution
An NBFC-MFI is a non-deposit taking financial institution. It must have a Minimum Net Owned Funds (NOF) of Rs. 5 crore to qualify as an NBFC-MFI and at least 85% of its Net Assets must be in the nature of Qualifying Assets – assets that require a substantial period before they can be used or sold. This differentiates an NBFC-MFI from other NBFCs as MFIs cater to smaller social strata, offering smaller amounts as loans.
The Way Forward
NBFC-MFI plays a pivotal role in maintaining consumption demand as well as capital formation in smaller social strata. Therefore, it is crucial for them to have continuous access to funding. The partial credit guarantee programme is expected to systematically ensure this continuity.