News Excerpt
Recently, the Finance Ministry announced plans to extend and modify the Partial Credit Guarantee Scheme (PCGS) 2.0. It has been decided to extend the scheme for three more months to build up the portfolio. The Ministry had expanded the scope of the partial credit guarantee scheme (PCGS) to provide greater flexibility to state-owned banks in purchasing bonds and CPs of Non-banking financial companies (NBFCs).

Pre-Connect
•    The Central government had announced the PCGS in July 2019, allowing public sector banks to purchase high-rated pooled assets from financially sound NBFCs and Housing finance companies (HFCs).
•    As a part of its AtmaNirbhar initiative, the Finance Ministry had extended the scheme in May to cover primary market issuance of bonds by NBFCs, HFCs and micro finance institutions (MFIs) with low credit ratings.
•    The idea was to provide liquidity support to institutions with low credit ratings and ensure continuity of credit support to small businesses, which were the worst hit during the COVID- 19 outbreak.

Analytica
    Under PCGS 2.0, the Centre provided 20% first loss sovereign guarantee to public sector banks, resulting in liquidity infusion of Rs. 45,000 crore into the system.
    The scheme covered papers with ratings of AA and below, including unrated papers, aimed at providing access to fresh liquidity support to non-bank lenders.
    The maximum headroom permissible for purchase of bonds and CPs rated AA/AA- was a fourth of the total portfolio at Rs. 11,250 crore.
    According to the ministry, this will be extended to 50%, as the 25% ceiling for AA/AA- rated bonds and CPs was nearly met, while the appetite for low-rated papers is inching towards saturation, considering its lower ticket size.
    The Cabinet also approved a special liquidity scheme worth Rs 30,000 crore, under which the Reserve Bank of India will indirectly purchase debt sold by non-banking financial companies (NBFCs), housing finance companies (HFCs) and micro-finance institutions (MFIs)

Issues
    This is a step towards increased funding for bigger NBFCs which have higher ratings, while the actual objective was to provide greater funding to small and medium NBFCs.
    The government needs to expand the scope so as to extend the guarantee cover to term loans of banks and financial institutions given to NBFCs.
    Less than 100 NBFCs have been covered under the scheme.
    A majority of small and medium NBFCs turn to term loans, instead of raising funds via bonds or CPs.

Way Forward
NBFCs play a crucial role in sustaining consumption demand as well as capital formation in the small and medium segment, thus it is essential that they continue to get funding without disruption, and the extended PCGS is expected to systematically enable the same. The government can further expand the scope of the Scheme so as to extend the guarantee cover to term loans of banks and financial institutions given to NBFCs.