Money & Banking

NABARD to give refinance to SFBs to provide short-term credit to farmers, small businesses

K Ram Kumar Mumbai | Updated on April 13, 2020

The National Bank for Agriculture and Rural Development (NABARD) has decided to open its refinance tap for Small Finance Banks (SFBs) to augment their resources for providing short-term credit to farmers, small business units and micro enterprises.

This move is significant as it comes at a time when those at the ground level are reeling under the impact of the 21-day nation-wide lockdown, which was imposed with effect from March 25 to tackle the Covid-19 pandemic, and the sequential slowdown which started from the first quarter of FY19.

The refinance support from NABARD is expected to further boost the ability of SFBs to lend to the so-called priority sector, which includes farmers, small business units and micro enterprises, and help them mitigate the effects of lockdown and slowdown.

SFBs have proven expertise in providing credit to the priority sector. This is underscored by the fact that in June 2019, the Reserve Bank of India (RBI) said its review of the performance of SFBs revealed that they had achieved their priority sector targets and thus attained their mandate for furthering financial inclusion.

According to NABARD, the purposes for which it will provide refinance assistance to SFBs will be in respect of their short-term disbursements for various purposes, including short-term/ working capital loans for agriculture and allied sectors, non-farm sectorS (including artisans, weavers, handicrafts, etc), marketing of agri produce, agri inputs, non-farm produce, and bonafide trade activities.

For drawing refinance from NABARD, an SFB has to comply with the minimum capital to risk-weighted assets ratio (CRAR) of 15 per cent; its net non-performing assets should not exceed 5 per cent of loans and advances outstanding for the bank as a whole; and it should be in profit.

Agriculture, micro, small and medium enterprises (MSME) and other eligible short-term loans lent for a duration not exceeding 12 months, which are outstanding in the books of an SFB as on the date of drawal application, non-overdue and unencumbered, will be eligible for NABARD’s refinance.

The government-owned rural development bank, in a circular, said it will provide refinance to SFBs to the extent of 80 per cent of their lending for eligible short-term loans which are outstanding in the books of the bank on the date of application.

Short-term loans disbursed are repayable within 12 months from the date of disbursement. The interest rates and risk premium on refinance will be decided by NABARD based on prevailing market rate, risk perception, etc.

10 SFBs: Furthering financial inclusion

Currently, there are 10 SFBs ― Au, Capital, Fincare, Equitas, ESAF, Suryoday, Ujjivan, Utkarsh, North East, and Jana ― in the country. As per RBI data, as at March-end 2019, SFBs collectively had deposits aggregating ₹55,686 crore, and loans and advances aggregating ₹69,857 crore.

According to the central bank,the objectives of setting up SFBs is to further financial inclusion through provision of savings vehicles, supply of credit to small business units, small and marginal farmers, micro and small industries, and other unorganised sector entities, through high-technology, low-cost operations.

During 2018–19, NABARD provided short-term refinance support aggregating ₹90,088 crore to State Co-operative Banks (₹73,142 crore) and Regional Rural Banks (₹16,946 crore) to meet the seasonal credit demand for rural economic activities.

Published on April 13, 2020

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