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Event update: Financials - Credit guarantee scheme; Better than expecteed

Credit guarantee scheme to enable state banks to buy securitized retail asset pools of NBFCs / HFCs

This was a budget proposal and the detailed scheme is out now.  When the budget was announced there was some confusion on whether the guarantee is valid for more than six months. However, the actual scheme is better than expected as the guarantee is valid for 2 years.  The time window during which state banks can avail the guarantee for buying NBFC pools is open for six months or till the limit of INR1 trillion of buyouts is exhausted. The government will guarantee the first loss of 10% with a maximum guarantee of 100bn for NBFC pools of Rs1 trillion purchased by state banks under this scheme. This scheme is open to NBFCs and HFCs though MFIs are excluded. Based on eligibility criteria, most NBFCs other than DHFL, Rel Home, Rel Commercial Credit qualify for this scheme. The aim of the scheme is to provide liquidity support to sound NBFCs that have temporary ALM mismatches, not to bail out stressed NBFCs. The focus is on retail assets which is why the size of each individual asset in the pool is capped at 50M. This would mean housing loans, vehicle loans, LAP would qualify while wholesale loans and LRDs will not. The maximum that an NBFC / HFC can sell is capped at 20% of standard loans or 50bn whichever is lower. We believe STFC, Indiabulls, Chola, MMFS, HDFC can be key beneficiaries of the scheme. While MMFS and HDFC do not securitize much currently, they can make use of the scheme. Most HDFC pools are assigned to HDFC Bank. Earlier RBI has relaxed single exposure limit to NBFCs. A bank’s exposure limit to a single NBFC has been hiked from 15% to 20% of Tier 1 capital, However, the credit guarantee scheme and RBI’s single NBFC exposure limit hike do not address a key problem that state banks have - which is - that some stare banks are very close to the sector cap of lending to NBFCs and do not have much leeway. Purchase of NBFC pools is counted as part of NBFC exposure. The Board can increase sector exposure limit to NBFCs but getting board approvals for increasing sector limits is not easy.

Key highlights

• The government has offered this guarantee only to state banks
• The guarantee will cover pool purchases of Rs1 trillion.
• The maximum amount of guarantee will be 10% of the fair value of the pooled assets or Rs 100bn whichever is lower.
• The time window for which state banks can avail guarantees is 6 months or till the value of 1 trillion of pooled assets is exhausted
• The guarantee can be invoked by banks upto 24 months from the date of purchase of pool if dues remain unpaid for more than 90 days.  As stated earlier the guarantee is limited to the first loss of 10%
• The NBFCs can buy back assets after 12 months

Eligible NBFCs / HFCs

• This scheme is to help sound NBFCs who have temporary ALM mismatches.
• The scheme is applicable to HFCs and NBFCs other than MFIs and core investment companies
• The originating NBFC should not be classified as SMA by any bank from 1st August 2018 to date
• CRAR should meet RBI’s minimum regulatory requirement of 12% for HFCs and 15% for NBFCs.
• NPAs should not exceed 6%
• The company should have made a net profit in at least one of the two preceding financial years.

Eligible assets

• Only assets originated upto 31st March 2019 qualify
• NBFCs can sell upto 20% of their standard assets on 31st March 2019  with a cap of 50bn.
• Pools should be granular with individual assets in the pool not more than Rs50m
• The pool should be rated AA or above at fair value
• NBFCs that sell assets under the scheme need to rework their ALM within 3 months of the sale to have positive ALM in each bucket for the first three months and on cumulative basis for the remaining period

·       The NBFC wanting to buy back assets cannot let its CAR fall below RBI norms. If it does promoters will have to infuse capital. NBFCs shall pay a fee of 0.25% to the government though the state banks that buy the pools.