Money & Banking

Non-scheduled UCBs should also get credit guarantee cover for loans given to MSEs, NAFUCB tells FM

K Ram Kumar Mumbai | Updated on April 23, 2020 Published on April 22, 2020

The National Federation of Urban Co-operative Banks and Credit Societies (NAFCUB) has urged Finance Minister Nirmala Sitharaman that non-scheduled urban co-operative banks (NSUCBs) should be allowed to become members of a Trust that provides guarantee for collateral-free loans given by lenders to micro and small enterprises (MSEs).

The federation, in a letter to the Minister, emphasised that permitting NSUCBs to become members of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) will encourage them to go all out to finance units in the MSE segment.

Economic slowdown

Currently, MSEs are bearing the brunt of slowdown and nation-wide lockdown due to outbreak of the corona virus pandemic.

CGTMSE has been set up by the government and the Small Industries Development Bank of India (SIDBI) to ensure availability of bank credit without the hassle of collateral / third-party guarantee to MSEs.

The Credit Guarantee Scheme (CGS) reassures a lender that in the event a MSE unit, which availed collateral-free credit facilities, fails to discharge its liabilities to it, the Trust would make good the loss, ranging from 50 to 85 per cent of the credit facility.

Jyotindra Mehta, President, NAFCUB, said: “With many micro and small enterprises (MSEs) shutting down on account of the effect of Covid-19 on the economy, vulnerable sections of population find themselves unemployed....

“An urban cooperative bank (UCBs) is typically a little man’s bank. It has immense potential to scale up loans to MSEs...CGTMSE is a very good institutional mechanism to support the lending institutions that are financing MSEs in a big way.”

Mehta emphasised that more than 90 per cent of the loans disbursed by the UCBs are of value not greater than ₹5 lakh. Most of the clients of these niche banks are those who are not readily serviced by commercial banks.

Eligible institutions

The eligible lending institutions that currently get CGS cover include all scheduled commercial banks and specified Regional Rural Banks, SIDBI, Non-Banking Finance Companies, and Small Finance Banks thathave entered into an agreement with the Trust for the purpose.

As far as UCBs are concerned, although there are 1,540 of them, only 3 are members of CGTMSE.

Mehta said the feedback received from UCBs is that the process of getting CGTMSE membership appears to take a long time.

“Presently, the Trust is apparently considering only scheduled UCBs as being eligible institutions for membership,” he said. Currently, only 54 out of 1,540 UCBs are recognised by RBI as scheduled banks.

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Published on April 22, 2020
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