Loans to MSMEs may get ‘risk-free’ tag

On FinMin nudge to RBI, banks may not need to set aside capital; Centre expecting less than 15% NPAs

The Reserve Bank of India (RBI) is likely to allow banks to assign zero risk weight for loans that will be extended to the micro, medium and small enterprises (MSMEs) under the ₹20 lakh crore economic package announced by the government earlier this month.

Also read: MSMEs will be the biggest casualty of COVID-19 in India: study

The Finance Ministry had requested the central bank to make these loans risk free, following an interaction with banks.

As a part of the package, a ₹3 lakh crore loan for the MSME sector was announced. This will be guaranteed by the National Credit Guarantee Trustee Company Limited (NCGTC) in the form of a Guaranteed Emergency Credit Line (GECL) facility.

However, such loans would attract a risk weight of a minimum 20% since these don’t come with direct government guarantee. This facility is similar to the loans that are guaranteed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

After banks highlighted the issue with the government, the Finance Ministry asked the RBI to waive the requirement of assigning a risk weight to the loans, sources said.

“The RBI is likely to waive the requirement of risk weight,” a source said. “The Finance Ministry is expected to issue detailed guidelines on this credit guarantee loan issue,” the source added.

Sources also said that the government had factored in less than 15% non-performing assets from this ₹3 lakh crore of loans.

“The government has said that it has made [available] a corpus of ₹41,600 crore for the scheme, which is spread over the next few years. This means the government is factoring in less than 15% non-performing assets, as of now,” said an official of a public sector bank.

Other small borrowers

Though primarily meant for the MSME sector, other small borrowers including non-banking financial companies can also avail themselves of the scheme, sources said.

The scheme will be applicable till October 31, or till an amount of ₹3 lakh crore is sanctioned, whichever is earlier.

Zero risk would mean that banks will not have to set aside additional capital for these loans. The move is aimed at encouraging lenders to extend credit, as banks have turned risk averse and have been reluctant to lend.

Finance Minister Nirmala Sitharaman, who met chief executives of public sector banks last week, said banks had been asked to extend loans automatically to eligible borrowers without fear of the ‘3Cs’ — CBI, CVC and CAG.

The tenure of loan under this scheme will be four years, with a moratorium period of one year on the principal amount. The NCGTC will not charge any guarantee fee.

The interest rate under the scheme is 9.25% if the loan is extended by banks and financial institutions, and 14% if by NBFCs.

This article has been corrected for a spelling error.