Finance

Brokerages raise concern over PSBs' appetite to buy lower-rated pool assets

Updated : December 12, 2019 01:57 PM IST

Under partial credit guarantee scheme, PSBs are allowed to purchase BBB+ or higher rated assets from NBFCs, and HFCs

Validity of the partial credit guarantee scheme may be extended by up to three months taking into account its progress.

Under the scheme, earlier PSBs were allowed only to purchase only AA-rated assets from these companies.

Global brokerages have raised doubts over public sector banks’ (PSBs) appetite for buying lower-rated pooled asset after the Union Cabinet on Wednesday approved changes to the partial credit guarantee scheme allowing them to purchase BBB+ or higher-rated assets from non-banking financial companies (NBFCs), and housing finance companies (HFCs).

The scheme was introduced in the Budget 2019-20 by Finance Minister Nirmala Sitharaman. Under the scheme, earlier PSBs were allowed only to purchase only AA-rated assets from these companies.

PSBs have been given a one-time two-year first-loss guarantee of up to 10 percent for purchase of higher-rated pools of loans from financially sound NBFCs, up to Rs 10,000 crore in aggregate.

The scheme would now cover NBFCs/HFCs that may have slipped into SMA-0 category during the one year period prior to August 1, 2018, and asset pools rated "BBB+" or higher.

"The window for one-time partial credit guarantee offered by the government will remain open till June 30, 2020, or till such date by which Rs 1,00,000 crore assets get purchased by the banks, whichever is earlier," said a statement issued by the government.

The finance ministry may extend the validity of the scheme by up to three months taking into account its progress, it said.

Terming it a positive step towards resolving temporary liquidity or cash flow mismatch issues, brokerages also raised doubts over PSBs' appetite for buying lower-rated asset pools.

Earlier, analysts had raised concerns that better quality pools were already sold to banks and there were lack of pools meeting AA rating requirement.

“Expansion of addressable pool base is a positive in this context. That said, we remain skeptical of PSBs' willingness to buy BBB+ rated pools despite partial credit guarantee. Also, only a few larger SOE Banks viz. State Bank of India or Bank of Baroda have the necessary skills to evaluate loan pools, in our view,” global brokerage Jefferies said in a note.

Morgan Stanley stated that the cases where banks are rationing credit supply to certain NBFCs or HFCs reflect very conscious risk management decisions.

“This is a good step, in our view, but will it increase PSU banks' risk appetite for loans from NBFCs/HFCs that have been facing trust deficits with respect to the quality of their assets and hence funding constraints. Such an outcome is possible, we think, but achieving it will not be easy,” said Morgan Stanley.

The brokerage also said that on-balance-sheet lending of banks to NBFCs is up by 27 percent since October 2018 (after the initial large drawdown of credit lines by NBFCs), and banks have purchased loan assets aggressively.

“In fact, banks have bought significant pools of retail loans from such NBFCs / HFCs (which meet their credit norms). Beyond this, it might not be an easy decision to buy more pools for a partial credit guarantee (10 percent) and for a limited period (two years),” Morgan Stanley added.

Credit Suisse said believes that wholesale debt market differentiation among NBFCs hasn’t eased.

“Long-dated funding is still largely available to select few NBFCs. There is limited headroom for increase in NBFC exposure for PSU banks from 10-15 percent,” Credit Suisse said.

The brokerage said that it prefers retail-focused NBFCs such as HDFC, M&M Finance, Cholamandalam Investment and Finance Company and LIC Housing.