Partial Credit Guarantee Scheme 2.0

Satya Pal Malik is Meghalaya Governor

• Goa Governor Satya Pal Malik has been appointed Governor of Meghalaya, a statement from the Rashtrapati Bhavan said
• Maharashtra Governor Bhagat Singh Koshyari has been given the additional charge of Goa
• Mr. Malik, who was Governor of Jammu and Kashmir when its special status under Article 370 was revoked last August, will replace Tathagata Roy in Meghalaya.

Source: The Hindu

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The government has extended the scope of the Partial Credit Guarantee Scheme (PCGS) 2.0 to provide greater flexibility to state-owned banks in purchasing bonds and Commercial Papers (CPs) of Non-Banking Financial Companies (NBFCs).

Background:

• The PCGS was announced in July 2019, allowing public sector banks to purchase high-rated (BBB+ or above) pooled assets from financially sound NBFCs and Housing Finance Companies (HFCs).
• A pool of assets is basically a securitization of loan portfolio i.e. conversion of a loan into a marketable security, typically to raise cash by selling them to other investors.
• These are sold by NBFCs/HFCs to banks in return for an advance payment. NBFCs/HFCs get the much-needed money and banks get the interest-paying assets.
• Credit ratings are an analysis of the credit risk associated with a financial instrument or a financial entity. These range from AAA to C and D.
• As a part of the Aatmanirbhar initiative, the scheme was extended in May 2020 (PCGS 2.0) to cover primary market issuance of bonds/CPs by NBFCs, HFCs, and Micro Finance Institutions (MFIs) with low credit ratings.
• The Centre provided a 20% first loss sovereign guarantee to public sector banks for purchase of bonds/CPs, 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.

Latest Extension:

• The Scheme has been extended for three months, giving public sector banks time till 19th November 2020 to build their portfolios of bonds and CPs from non-banking financial institutions.
• Further, the government has allowed banks to invest upto 50% of total investments under the Scheme in AA and AA-rated bonds.
• This decision was taken as the earlier limit for such investments at 25% was almost met.

Criticism:

• The latest announcement 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.
• Less than 100 NBFCs have been covered under the scheme as a majority of small and medium NBFCs turn to term loans, instead of raising funds via bonds or CPs.

Note:

• Bonds: Borrowers issue bonds to raise money from investors willing to lend them money.
• Commercial Paper: It is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for meeting the short-term liabilities.
• Primary Market: The primary market is where companies issue new security, not previously traded on any stock exchange. Securities issued through a primary market can include stocks, corporate or government bonds, notes, and bills.
• The secondary market is where investors buy and sell securities they already own.

• NBFCs play a crucial role in sustaining consumption demand as well as capital formation in the small and medium segment, thus they must 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 to extend the guarantee cover to term loans of banks and financial institutions given to NBFCs.

Source: PIB