There needs to be an “alternative rating mechanism” for the cash-starved MSME sector to help boost credit flow to the sector. Rating agencies currently follow the rules devised for corporates for rating MSMEs as well.

According to Rajkiran Rai, MD & CEO, Union Bank of India, while there have been some initial discussions with CIBIL on developing a separate framework for rating MSMEs, nothing much has progressed so far.

“An alternative rating mechanism can be developed for the MSMEs….we all have to work together to have a separate benchmark for the sector. There have been some discussions with CIBIL but they have not yet been taken forward. This could be a solution (to enhancing credit flow to the sector),” Rai said, at an e-session organised by the Bharat Chamber of Commerce on Monday.

Interest subvention scheme

The MSME sector, which is already reeling due to lack of capital and supply-side issues, has further been hit hard by the lockdown due to the Covid-19 pandemic. The ongoing crisis has hit the demand side of most MSMEs and there is not much clarity as to when things would start showing signs of improvement.

Apart from boosting credit flow, there is also a need to lower the rate of interest at which banks lend to the sector. However, banks are unable to lower interest rates on advances as they cannot bring down deposit rates below a certain level — that would be difficult in view of the large number of senior citizens who are dependent upon it.

Rai, therefore, hinted at the need to have an interest subvention scheme for MSMEs to address the issue.

“Our hands are tied with regard to reducing interest rates. Our source of funds is deposits and as long as that remains high, lending rates will continue to be high. Moreover, the credit cost in lending to MSMEs is higher due to the high NPAs so it is difficult to bring down interest rates. One way of bringing it down could be interest subvention but banks cannot do this alone, they need support from government and regulator,” he said.

Deep restructuring

While banks can provide relief in the form of some temporary liquidity to meet the payment obligations of MSMEs, the government and regulator, along with the banking system, have to take concerted efforts to bail out the sector.

Liquidity support might not be the only solution to the problems faced by the sector, as many firms might need ‘deep restructuring’.

“Quickest response in this crisis is temporary liquidity support to MSMEs. As we go forward, lot of policy interventions will be needed…….we need to see what kind of cash flow is available with the MSMEs. Based on that, some kind of deep restructuring needs to be done, but this has to come from the regulator. Viability of units will depend upon much bigger issues than just credit alone,” he pointed out.

While credit is an immediate need of MSMEs, however, too much credit could also lead to over-leveraging and hence there is a need to balance borrowing so as to keep the sector viable.

According to him, close to 50 per cent of MSME customers of Union Bank of India have opted for moratorium.

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