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Partial Credit Guarantee Scheme 2.0

  • IASbaba
  • August 19, 2020
  • 0
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Partial Credit Guarantee Scheme 2.0

Part of: GS Paper – II GS Paper – III Government Policies & InterventionsGrowth & DevelopmentBanking Sector & NBFCs

Context: 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 securitisation of loan portfolio i.e. conversion of a loan into a marketable security, typically for the purpose of raising 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 is 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 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.

Recent 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.

Prelims busters:

  • 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 a 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.

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