Explained: Will the banks open the fund of funds for the MSMEs sector? Government guarantee helps, but depends a lot on the fine print

Workers are seen resuming work in Katraj when few industries start operating. (Express photo by Ashish Kale)

The government’s decision to establish a liquidity infusion package for micro, small and medium-sized companies, which implies providing MSMEs – whose accounts are standard – unsecured loans totaling Rs 3.00 trillion are expected to increase the flow of funds to billions 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 of up to Rs 25 million and a turnover of up to Rs 100 million can make use of these loans for up to 20 percent of their outstanding credit.

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Will banks show up to lend to MSMEs?

MSMEs, which represent around 45 percent of the country’s total manufacturing production, 40 percent of exports, almost 30 percent of national GDP are stressed due to the exhaustion of internal reserves and the low visibility of demand for the 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 downturn resulting from the blockade. Industry sources said banks will be more than willing to make these loans available to MSMEs, as they are fully backed by the government against credit losses. Measures for MSMEs through guarantees, capital infusion and debt support will incentivize bank loans to MSMEs, in addition to providing crucial support to entities stressed in the current situation, said the President of the State Bank of India, Rajnish Kumar. While MSMEs that already have bank loan accounts may benefit immediately, companies taking out loans for the first time may face difficulties.

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How will bank funds flow to MSMEs?

Banks have already indicated that they are willing to lend to MSMEs and NBFCs, provided that the government grants the guarantee. The Association of Indian Banks (IBA) proposed the guarantee last month to intensify the flow of credit to the MSMEs sector, which is in crisis due to the blockade caused by the coronavirus. The stipulation that banks and NBFCs that extend Rs 3 lakh crore as standard credit to MSMEs must receive 100 percent government credit guarantee coverage on interest and the principal is expected to incentivize banks to extend loans to MSMEs without any hesitation, said a bank official. These loans may be available until October 31, 2020 and there are no new guarantees. While these loans are expected to be sanctioned by banks through normal channels, they do not expect any risk due to collateral.

However, bankers say more clarity is needed in the case of the proposed subordinated debt provision of Rs 20,000 crore available to stressed MSMEs. Two lakh of MSMEs that are NPA or stressed can make use of this facility. Up to Rs 4 billion will be provided to the Credit Guarantee Fund, which in turn will provide partial credit guarantee support to banks. The debt granted by the banks will be used to infuse capital into the unit by the promoter. However, it is still unclear whether the funds will be refinanced directly from the budget or from some other agency. There is no clarity on whether the RBI will provide this money through its liquidity window or whether it will be routed through a mechanism like MUDRA that is registered with the RBI as NBFC or SIDBI. Under the MUDRA scheme, loans issued by banks are refinanced by MUDRA. (Read the highlights of the Sitharaman press conference)

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Who is providing funds?

Technically, the banks are providing the funds (Rs three lakh crore) for your kitty. It is not from the government of the government. The trap is the guarantee offered by the government. This is a great comfort to banks that are burdened with about Rs 10 lakh crore bad loans.

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Bankers await detailed guidance from the government and / or the RBI on MSME schemes. A fund of funds is being created to support MSMEs struggling to grow due to capital shortages. These MSMEs will be offered a capital infusion of Rs 50 billion rupees with an initial Rs 10 billion rupees from the government. While the budget is likely to be Rs 10,000, it is unclear how the balance is being organized.

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TransUnion Cibil has said that loans worth Rs 232,000 crore to MSMEs have a higher risk of becoming non-productive assets. If some of the loans granted to MSMEs become NPAs, the responsibility will fall on the government through the credit guarantee fund.

How will it affect the credit culture?

Despite the fact that loan ceilings may be opened for MSMEs with credit shortages, analysts also warn that this could affect the credit culture as banks may be lenient in credit evaluation. A 12-month moratorium on repayment could also mean that any expected unprofitable asset issues will be eliminated in the future. It is also debatable whether banks will follow a strict credit evaluation for loans that are fully backed by the state guarantee. “The full guarantee scheme of Rs 3 lakh crore will provide a much-needed boost to the disbursement of credit to MSMEs that lack cash. However, the risk of deterioration of the credit culture will continue to be controllable, since the bankers would have no skin in the game and, therefore, the ad hoc disbursement can increase the risk, “said Isha Chaudhary, Director, CRISIL Research.

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