Partial Credit guarantee scheme 2.0 modified; extends it by three months

The government on Monday extended the validity of its partial credit guarantee scheme (PCGS) 2.0 by three months to November 19, 2020, to build the portfolio. Its scope was extended to provide greater flexibility to the state-owned banks in purchasing bonds and commercial papers of the non-banking financial companies (NBFCs).

The finance ministry said the portfolio level of AA and AA- investment sub-portfolio will be extended to 50 per cent instead of 25 per cent stipulated earlier of the total portfolio of Bonds and CPs purchased by public sector banks (PSBs) under the scheme. It was extended as the 25 per cent ceiling for the AA and AA-rated bonds and CPs was nearly met.

It enabled PSBs to raise their AA and AA- investment sub-portfolio under this scheme by another Rs 11,250 crore.

Under PCGS 2.0, the Union Government provided 20 per cent first loss sovereign guarantee to public sector banks, which resulted 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.

Partial Credit Guarantee Scheme (PCGS)

The Union Government had announced the partial credit guarantee scheme in July 2019. Under the scheme it allowed the public sector banks (PSBs) to purchase high-rated pooled assets from financially sound NBFCs and housing finance companies (HFCs).

The scope of the facility was extended by the finance minister Nirmala Sitharaman as part of its Aatmanirbhar (self-reliant) initiative in May to cover primary market issuance of bonds by NBFCs, HFCs and micro finance institutions (MFIs) with low credit ratings.

Idea behind extension

The scope was extended with an idea to provide liquidity support to institutions with low credit rations and ensure continuity of credit support to small businesses hit worst during the COVID-19 outbreak.