The Hindu Business Line : Micro and small enterprises get a lifeline

Unveiling the “monetary” chapter of the much awaited stimulus package, the Reserve Bank of India has cut short-term lending rates – the repo and reverse repo rates by one percentage point each to 6.5 per cent and 5 per cent, respectively.

Other monetary initiatives such as “priority loan” classification for bank lending to home finance companies, a new refinance facility to SIDBI to small enterprises and restructuring facilities for commercial real estate exposures and viable units having cash-flow problems, have also been unveiled.

Cash is King

While the one percentage point cut in repo rates is a continuation of the easing interest rate policy set in motion by RBI a month ago, it is the corresponding cut in reverse repo rates that may have key implications for banks.

This is a signal that the RBI now feels that there is enough liquidity in the system and intends to encourage banks to lend the surpluses already made available to them. In the last three days, banks had parked more than Rs 50,000 crore in the reverse repo window; call rates have moderated nearly to the level of reverse repo rates. Recent RBI data show that banks have preferred to maintain at least some of the excess liquidity pumped by the RBI in the form of cash or invest it in gilts, rather than lending it.

This is evident if one looks at the fortnight credit to deposit ratio which is trending down (from 75.1 per cent to 74.8 per cent in two months) and excess cash to deposit ratio is trending up.

Signal on lower rates

The continuing repo rate cuts by the RBI are also a signal to banks that they must further lower lending rates. While PSU banks have already begun to reduce their lending rates, private banks are yet to match their cuts. Until now, deposit rates have not fallen as sharply as lending rates. This RBI move may prompt further deposit rate cuts, as net interest margins of banks will now be under pressure.

As the banks are going slow on lending to micro and small enterprises (MSEs), the RBI has opened a Rs 7,000-crore refinancing facility for 90 days to SIDBI which will help SIDBI-funded MSEs, directly and indirectly. Bank exposure to MSEs may thus be less risky, as it is routed through SIDBI.

The decision by RBI to classify the loans granted by banks to HFCs (for lending to individuals on housing loans not exceeding 20 lakh) as ‘priority’ lending may help banks meet their priority sector targets more easily. Exposure to HFCs may also be less risky for banks than direct exposure to retail home loan borrowers.

The RBI has also come up with guidelines suggesting that the banks may restructure exposures to commercial real estate and viable units which are facing temporary cash crunch, retaining them as standard assets. If banks implement this, the profitability of the banks for the succeeding two quarters may take a hit (profits are postponed) as companies which are facing temporary cash crunch (though classified as standard assets) may not be able to service their debt in time.

However, this is now a temporary measure. It needs to be seen if the facility is extended if the credit crisis persists.

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