As covid-19 threatens operations of small businesses in India, banks have requested the Union government to fully guarantee their incremental loans to micro, small and medium enterprises (MSMEs) of at least 50,000 crore, said two people aware of the development.

The request was made through the Indian Banks’ Association (IBA) and is currently being examined by the government, said the people cited above, on condition of anonymity.

Banks have lent a total of 4.78 trillion to small businesses for the fortnight ended 28 February, showed data from the Reserve Bank of India (RBI).

The MSME sector, which employs millions of people, is one of the casualties of the ongoing countrywide lockdown that has led to closure of factories and businesses as the government intensifies steps to contain the covid-19 pandemic.

“We have suggested to the government that the sector needs at least an additional 10% of the existing loans to revive it during duress. The guarantee on 50,000 crore of loans would serve the dual purpose of easing the credit crunch of small businesses and allow us some security in terms of loss absorption,” said the first person cited above.

While the current Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme guarantees between 50-85% of loans up to 2 crore, risk-averse lenders now want an assurance for the entire loan, and not limited to 2 crore. Introduced in 2000, the scheme is designed to help small businesses borrow at cheaper rates from banks and non-banks.

“If approved by the government, the scheme should be effective for fresh MSME loans from the date of the notification,” the second person said, adding that the loans could be processed on a web portal like using the goods and services tax (GST) data of businesses., came into focus after Prime Minister Narendra Modi in 2018 announced a series of measures designed to help small businesses by giving them access to quick finance. The ‘micro, small and medium enterprises support and outreach’ programme launched by Modi was meant to grant quick access to credit at attractive terms.

The issue of guaranteed loans was raised by State Bank of India (SBI) chairman Rajnish Kumar last week in a call with representatives from the real estate sector.

“In the current circumstances, this (government guarantee) would be the best way and this is what we have been telling the government. The risk capital comes from the government, liquidity comes from the Reserve Bank of India, and the intermediation is done by the public sector banks. So, that is a workable model because the risk appetite of banks is limited,” said Kumar.

The share of the MSME sector in India’s gross domestic product (GDP) stood at 30.3% in FY19, up from 29.7% in FY18, according to data submitted in the Parliament on 12 March.

However, the flow of credit to small businesses has remained sluggish for quite sometime now. In fact, loans to micro and small industries have declined 1.1% between March 2019 and February 2020, and fell 0.4% on a year-on-year basis, showed data from RBI.

The situation seems to be slightly better for medium enterprises with year-on-year loan growth of 3.9% and year-to-date growth of 1% at the end of February this year.

Industry body Confederation of Indian Industry (CII) on Tuesday sought measures from the government to help the MSME sector.

It said that banks should be allowed to provide additional working capital limits, which must be accompanied by relaxing norms related to collaterals, based on the earlier track record of the MSMEs.

Meanwhile, in February, the central bank had notified extension of the deadline for a one-time restructuring scheme of small business loans by another nine months to 31 December.

RBI had said that the aggregate exposure, including non-fund based facilities, of banks and non-banking financial companies (NBFCs) to the borrower should not exceed 25 crore as on 1 January, 2020.

Centrum Institutional Research said in a note on Monday that for any economic revival, strong fiscal measures are essential and a part of this has already been spent in the 1.75 trillion package announced for the vulnerable sections of the society.

“However, a lot more needs to be done for the industry, especially for the SME/MSME sector,” Centrum said.


News Source: Livemint


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