Context:The Union Cabinet has approved the Sovereign portfolio guarantee of up to 20% of first loss for purchase of Bonds or Commercial Papers (CPs) with a rating of AA and below.


  • The existing PCGS was issued in November last year offering sovereign guarantee of up to 10% of first loss to PSBs for purchasing pooled assets worth rated BBB+ or above worth up to Rs. 1,00,000 crore, from financially sound NBFCs/ MFCs. 
    • The outbreak of COVID-19 along with lockdown of business activity has now necessitated adoption of additional measures to support NBFCs and HFCs.
    • On the liabilities side by providing a sovereign guarantee to cover purchase of Bonds/CPs issued by NBFCs/HFCs(Housing Finance Companies) and on the assets side by modifying the existing PCGS to widen its coverage.

More on the news:

  • These bonds or commercial papers include unrated paper with original/ initial maturity of up to one year issued by NBFCs/ MFCs/Micro Finance Institutions (MFIs) by Public Sector Banks (PSBs) through an extension of the Partial Credit Guarantee Scheme (PCGS).
  • The Cabinet also approved modifications in the existing PCGS on purchase of pooled assets, increasing its coverage by

New Provisions

Earlier provisions

  • Making eligible NBFCs/HFCs reported under SMA-1 category on technical reasons alone during the last one year. 
  • Earlier NBFCs/HFCs reported as SMA-1 or SMA-2 during this period were ineligible under the Scheme.
  • Relaxing the net profit criteria to the extent that the concerned NBFC/HFC should now have made a profit in at least one of the financial years of FY 2017-18, FY 2018-19 and 2019-20.
  • Earlier, the NBFC/HFC should have made a net profit in at least one of the financial years of FY 2017-18 and2018-19.
  • Relaxing the criteria regarding date of origination of assets to include new assets originating up to at least six months prior to the date of initial poolrating. 
  • Earlier, only assets originating up to 31.3.2019 were eligible under the Scheme.


Impact of PCGS 

  • COVID-19 crisis and consequent lockdown restrictions are likely to have a negative impact on both collections and fresh loan disbursements.
    • It will result in asset quality issues for the NBFC/ HFC/ MFI (Micro Finance Institutions)sector, along with low loan growth as well as higher borrowing costs for the sector, with a cascading effect on Micro, Small and Medium Enterprises (MSMEs). 
    • While the RBI moratorium comes as a breather on the assets side, the sector is likely to face increasing challenges on the liabilities side.
  • The extension of the existing Scheme will address the liability side concerns. 
    • In addition, modifications in the existing PCGS will enable wider coverage of the Scheme on the asset side also. 
    • Since NBFCs, HFCs and MFIs play a crucial role in sustaining consumption demand as well as capital formation in the small and medium segment, extending PCGS is expected to systematically enable the disruption free funding for them.


Non Banking Financial Companies(NBFC)


The non-banking financial companies are registered under the Companies Act, 1956.

The NBFCs majorly deal in the business of loans and advances, investments in bonds/shares/debentures/stock and other marketable securities like lease, hire-purchase, insurance business.

However, their business do not include any institution which is principally engaged in the business of agricultural activity, purchase of any goods and services (other than securities), industrial activity and sale/purchase/construction of immovable property.


Types of NBFCs

There are two kinds of NBFCs.

  • Deposit-taking NBFCs
    • The non-banking companies, registered with the Reserve Bank of India can accept the public deposits and must comply with the following regulations issued by RBI.
  • Non-deposit taking NBFCs

Major difference between Banks and NBFCs






They provide certain banking services without holding a Bank License.

It is a government authorized financial intermediary which provides banking services to the public.


Companies Act, 2013

Banking Regulation Act,1949

Demand Deposit

Cannot be Accepted

Can be Accepted


Allowed up to 100%

Allowed up to 74% for Private Sector Bank

Payment and Settlement system

Not a part of the System

An Integral part of the System

Maintenance of Reserve Ratios



Deposit Insurance Facility

Not Available


Transaction Services

Cannot be provided by NBFC

Provided by Bank

Special Mention Accounts


  • SMAs are those assets/accounts that show symptoms of bad asset quality in the first 90 days itself.
    • This classification was introduced by the RBI in 2014, to identify those accounts that have the potential to become an NPA/Stressed Asset. 
    • The rationale behind such a classification is to have an early identification that will help to tackle the NPA problem better.

SMAs and NPA

  • It is different from NPA in the sense that NPA has a duration of 90 days, while the worst type of special mention account (SMA – 2) has less than 90 days duration. 

Classification of SMAs

SMA Sub category



No financial signals of stress.


Principal or interest payment not overdue for more than 30 days but accounts showing signs of impending stress.


Principal or interest payment overdue between 31-60 days.


Principal or interest payment overdue between 61-90 days.


Image Source: Financial Express