On 24th August 2020, the National Bank for Agriculture and Rural Development (NABARD) said that it has introduced a dedicated debt and credit guarantee product to ensure unrestricted flow of credit in rural areas hit by the COVID-19 pandemic.
The Guarantee Program of NBFC-MFIs involves offering a partial guarantee on pooled loans extended to small and mid-sized microfinance institutions (MFIs). This has come in the backdrop of most MFIs being excluded from the moratorium benefits from banks, creating a dip in collections, resulting in widening asset-liability mismatch, credit downgrades, and a spike in the cost of fresh funding.
NABARD had signed an agreement with Vivriti Capital and Ujjivan Small Finance Bank NSE -1.13 % at the beginning of this month to roll out the initiative, which will improve the approach to sustainable finance for microenterprises and low-income households.
This will help to meet the much-needed financing to millions of households, agricultural and, business markets to sustain in the post-COVID-19 environment. It will help to facilitate Rs 2,500 crore funding in the initial phase and is expected to move up. The plan is expected to cover over 1 million households across 28 states and 650 districts.
The
pooled loan issuance (PLI) structure offers the bank sufficient comfort through
NABARD’s partial credit protection, lowers the cost of capital as the rating of
the loans gets notched up, and helps lenders meet the priority sector goals.
Under
a PLI structure, a bank or an NBFC (Principal Lender), provides loans to
identified Microfinance Institutions or other NBFCs. Each of these loans are
made as per terms agreed upon between the Principal Lender and the Borrowers in
keeping with the Principal Lenders underwriting and credit evaluation
practices. The loans offered are pooled together and credit is enhanced by way
of a common partial guarantee offered by identified guarantors to the
structure.
From the beginning of the pandemic,
NABARD has presented out special liquidity lines and has distributed around Rs
2,000 crore to MFIs and non-banking financial companies (NBFCs).
NBFC-MFI
plays a crucial role in sustaining consumption demand as well as capital
formation in the smaller level of strata, thus they must continue to get
funding without disruption, and the partial credit guarantee program is
expected to systematically enable the same.
