The government’s decision to put in place a liquidity infusion package for micro, small and medium enterprises, which entails providing MSMEs — whose accounts are standard — collateral-free loan totaling up to Rs 3,00,000 crore, is expected to boost fund flow to lakhs of stressed units in the sector. These loans will have a four-year tenure, a 12-month moratorium on principal payments and a cap on interest costs. The government has said it will provide a full guarantee to lenders against expected credit losses on these loans. MSMEs with outstanding loans up to Rs 25 crore and turnover up to Rs 100 crore can avail these loans up to 20 per cent of their outstanding credit.
Will banks come forward to lend to MSMEs?
MSMEs, which make up for about 45 per cent of the country’s total manufacturing output, 40 per cent of exports, almost 30 per cent of the national GDP are stressed due to depleting internal reserves and low visibility of demand for next six months at least. The availability of funds through the banking channel, along with a moratorium on repayment, would help them survive through the economic slump resulting from the lockdown. Industry sources said banks will be more than forthcoming to grant these loans to MSMEs since these are fully backed by the government against credit losses. The measures for MSME through guarantees, equity infusion and debt support will incentivise bank lending to MSMEs as well as providing crucial support to stressed entities in the current situation, said State Bank of India Chairman Rajnish Kumar. While MSMEs already running loan accounts with banks may benefit immediately, companies that take loan for the first time may face difficulties.
How will bank funds flow to MSME?
Banks had already indicated that they are willing to lend to MSMEs and NBFCs, provided the government gives the guarantee. The Indian Banks Association (IBA) proposed the guarantee last month to step up credit flow to the MSME sector which is in the doldrums due to the lockdown triggered by the coronavirus. The stipulation that banks and NBFCs extending Rs 3 lakh crore as standard MSMEs credit are to be provided 100 per cent credit guarantee cover by the government on interest and principal is expected to incentivize banks to extend MSME loans without any reluctance, said a bank official. These loans can be availed till October 31, 2020 and there’s no fresh collateral. While these loans are expected to be sanctioned by banks through the normal channels, they don’t expect any risk due to the guarantee.
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However, bankers say more clarity is needed in the case of the proposed Rs 20,000 crores subordinate debt provision available for stressed MSMEs. Two lakh MSMEs which are NPAs or are stressed can avail of this facility. As much as Rs 4,000 crore will be provided to Credit Guarantee Fund Trust which will in turn provide partial credit guarantee support to banks. The debt given by the banks will be used to infuse equity in the unit by the promoter. However, it’s still not clear whether the funds will be refinanced directly from budget or some other agency. There’s no clarity on whether the RBI will provide this money through its liquidity window or it will be routed through a mechanism like MUDRA which is registered with the RBI as an NBFC or SIDBI. Under the MUDRA scheme, loans issued by banks are refinanced by MUDRA. (Read highlights from Sitharaman’s press conference)
Who is chipping in with funds?
Technically, banks are providing the funds – Rs three lakh crore — from their kitty. It’s not going from the government exchequer. The catch is the guarantee offered by the government. This is a big comfort for banks which are saddled with close to Rs 10 lakh crore bad loans.
Bankers are expecting detailed guidelines from the government and/ or the RBI on the MSME schemes. Fund of funds is being created to support MSMEs which are struggling to grow due to shortage of capital. These MSMEs will be offered an equity infusion of Rs 50,000 crore with an initial Rs 10,000 crore from the government. While Rs 10,000 crore will be probably from the budget, it’s not clear how the balance amount is being arranged.
TransUnion Cibil has said loans worth Rs 232,000 crore of MSMEs are at a higher risk of becoming non-performing assets. If some of the loans being given to MSMEs become NPAs, the liability will come to the government through the credit guarantee fund.
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How will it impact credit culture?
Even as loan taps may open up for credit-starved MSMEs, analysts also caution that this could impact the credit culture as banks may become lenient in credit assessment. A 12-month moratorium on repayment could also mean that any problem of expected non-performing assets will be kicked down the road. Whether banks will follow stringent credit appraisal for loans that are fully backed by state guarantee is also debatable. “Rs 3 lakh crore complete guarantee scheme will provide a much-needed push to credit disbursement to cash-starved MSMEs. However, the risk of credit culture deteriorating will remain a monitorable, as bankers would have no skin in the game and hence ad hoc disbursement may increase risk,” said Isha Chaudhary, Director, CRISIL Research.
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