New Delhi, Aug 2 (IANS) The Finance Ministry on Friday said it will put in place an oversight mechanism for the one-time partial credit guarantee scheme for public sector banks (PSBs) for purchase of high-rated pooled assets of financially sound non-banking finance companies (NBFCs) announced in the Union Budget.

"The Department of Financial Services would put in place an oversight mechanism for this scheme. The government has received a proposal from RBI (Reserve Bank of India) on draft modalities of the guarantee to operationalise the Budget announcement on this, which would be set in motion by RBI," an official statement said.

Presenting the full Budget 2019-20 last month, Finance Minister Nirmala Sitharaman had announced that the government would provide a one-time six months' partial credit guarantee to PSBs for the first loss of up to 10 per cent to enable them to purchase pooled assets of financially sound NBFCs amounting to Rs 1 lakh crore.

This was aimed at ensuring financial support to the stressed housing finance companies (HFCs) and NBFCs which were facing a severe liquidity crunch following the series of payment defaults by IL&FS. This caused the drying up of bank funds to the NBFCs and HFCs from lenders fearing further addition to their massive non-performing assets (NPAs or bad loans), creating, thereby, a spiral effect on the economy.

"This would ease the liquidity stress in the NBFC sector and increase the access of these NBFCs to bank finance and, in turn, would enable them to continue to play their role in meeting the financing requirements of the economy", the statement said.

Sources here said the state-run banks would be allowed to pick up primarily 'AAA' rated assets of the NBFCs who have not defaulted, while only banks outside the RBI's Prompt Corrective Action (PCA) framework for resolving bad loans and those with strong balance sheets like State Bank of India (SBI), Canara Bank and Bank of Baroda would be allowed to participate in the scheme.

In a bid to improve regulatory oversight, the government has also proposed to bring housing finance companies under the RBI, removing them from the control of the National Housing Bank. All these steps are aimed at improving the condition of the NBFC sector as a whole.