The RBI’s measures, announced on Friday, have provided the much-needed relief to the micro, small and medium enterprises (MSME) sector, which is worried about the future in view of the Covid-19 outbreak and consequent lockdown for 21 days.
While the rate cuts could lead to a reduction in banks’ MCLR and external rates, which, in turn, will reduce the borrowing costs for MSMEs as well as individual borrowers, deferment of payments is expected to provide a big relief to borrowers, especially small traders, who have faced a complete halt in their activities.
“The much-awaited news from the RBI has brought confidence to the depressed business community. Never before has this country witnessed such a situation, and the steps taken by the RBI is a first-of-its-kind exercise and very timely,” said X Arokianathan, Co-Convenor, MSME Panel, CII-Tamil Nadu.
The interest on working capital facilities being deferred by three months will help businesses meet their immediate needs such as wages and other urgent bills.
However, the request from several industry members is to waive the interest on the working capital (WC) loans for this period as practised in other countries. The moratorium on payment of loan instalments for the next three months without affecting the credit rating is a big relief for now, especially for the self-employed and middle-class borrowers, he said.
Since payment deferrals will not be classified or reported as default, companies’ credit history will remain intact, thereby not increasing the cost of any potential borrowings in the future. This deferral will also provide relief to banks as their NPA levels will not increase (preserving capital for business instead of using it for provisions) as they were facing some challenges in collecting repayments from borrowers due to the lockdown, according to rating agency CARE.
“Measures to ease financial pressures on businesses and individuals by way of a moratorium of three months on term loan repayments, interest on working capital facilities, and easing of working capital norms will bring a big relief to small and medium-sized companies and individual borrowers,” said Shanti Ekambaram, Group President, Consumer Banking, Kotak Mahindra Bank.
The reduction of repo rates and subsequent reduction of the interest burden on the borrowers will bring substantial relief.
“The warning about a big recession looming ahead cannot be ruled out. India cannot be immune to all that is happening around the world, but depends on how we respond to the situation. It is up to banks to rise to the occasion and extend all timely help to those in need without any impediments to bring back our economy to shape as soon as possible,” he pointed out.
The FM has also deferred statutory payments to June 30, which is a big relief, felt SME industry representatives.
They also stated that speedy disbursal of all refunds due from the government would be a big economic boost.