Majority of MSMEs (micro, small and medium enterprises) and possibly around half of corporates have opted for deferment of interest on working capital facilities, opined State Bank of India’s economic research department in its report “Ecowrap”.

With around 75 per cent of such debt is “A” and above rated, the report expects the aforementioned entities to be able to pay the accumulated interest as scheduled or convert it into FITL (Funded Interest Term Loan).

“Though, majority of MSMEs will opt for FITL, it is important to see their repaying capacity/cash flows as the same needs to be paid within this financial year itself,” the report said.

As the MSME book from banking system stands at around ₹14 lakh crore, assuming that two-third have opted for moratorium and 70 per cent of it is working capital, the interest on around ₹6-7 lakh crore of loans, which is required to be funded through FITL, works to around ₹30,000-35,000 crore, per the calculations made by the department.

Deferment of interest on working capital facilities was among the various measures that the Reserve Bank of India announced on March 27, 2020, to mitigate the burden of debt servicing brought about by disruptions on account of the fall-out of the COVID-19 pandemic.

Referring to the RBI recently upping a bank’s exposure to a group from current 25 per cent to 30 per cent of the eligible capital base of the bank, the report observed that this move will facilitate large groups to raise funds from banks and also boost credit growth. The increased limit is applicable up to June 30, 2021.

“This ease in exposure limit by 5 per cent, will give additional headroom to the banking system (which has Tier-1 capital of approximately ₹12 lakh crore) to lend to the large corporate groups. For example, a Bank with an eligible capital base of, say, ₹2 lakh crore can get additional headroom of ₹5,000 crore to a group,” said Soumya Kanti Ghosh, Group Chief Economic Adviser.

IRAC norms

Ghosh opined that the income recognition and asset classification (IRAC) norms as it has evolved in India shows that there is no direct linkage between IRAC norm used by banks and economic growth.

Ecowrap underscored that the best period of economic growth 1994-2004 was achieved when RBI followed 180-day non-performing asset (NPA) recognition norm. The growth rates after 2004 have also been good when 90-day norm was in force, it added.

“The 90-day norm is not suited to Indian conditions as the liability side of the Indian banking system has very little market-based funding. Thus when resources are scarce, an accelerated recognition of assets will take a heavy toll not only on the economy but also on requirement of core capital by the banks under the current situation,” explained Ghosh.

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