News Analysis

Major relief for MSMEs, NBFCs, but gaps remain

Radhika Merwin | Updated on May 13, 2020 Published on May 13, 2020

There is a concerted move to push lending to MSMEs   -  Kamal Narang

Some of the MSME measures are part of Budget and Sinha panel recommendations

In the first of the series of fiscal stimulus packages, Finance Minister Nirmala Sitharaman, sought to offer relief to ailing MSMEs and NBFCs/MFIs.

While the measure on collateral-free loans for MSMEs with 100 per cent credit guarantee by the government, is welcome as it can help allay banks’ fear of lending to the MSME sector, other measures announced for MSMEs are either already part of the Budget or long awaited structural reforms laid down by the UK Sinha committee a year ago.

The ₹30,000-crore special liquidity scheme, which will cover primary and secondary market transactions in investment grade debt paper of NBFCs/HFCs/MFIs, is a positive move, as it will be fully guaranteed by the government. Banks that have been otherwise risk averse to lending to such entities will be willing to extend support. The extension of the partial guarantee scheme to lower rated NBFCs/MFIs, however may not be fully utilised and the fine print of these measures (such as restrictions on banks’ exposure to these bonds within the single/group borrower exposure limits etc) is awaited to gauge the actual impact.

Long awaited reforms

The Centre has announced emergency credit line for MSMEs up to 20 per cent of outstanding credit as on February 29. Bank credit to these segments stood at about ₹4.78-lakh crore as of February; 20 per cent implies up to ₹95,000 crore incremental credit.

However only borrowers (with standard account) with up to ₹25 crore outstanding and ₹100 crore turnover are eligible under the scheme, where in 100 per cent credit guarantee is given to banks and NBFCs (which means the government stands as guarantor in case of default). This should nudge lenders to extend credit to MSMEs.

However, the scheme is valid only till October 31. This may need to be extended until March next year, owing to the evolving Covid related risks. Also how many MSMEs benefit from this needs to be seen; according to the Finance Minister it will cover 45 lakh units. A recent report by CARE, states that there are around 6.3 crore non-agriculture MSMEs (excluding construction) in the country, of which about half are in rural areas.

MSMEs that are already under stress or NPAs are more in need of credit support amid the ongoing lockdown. While the government has announced ₹20,000 crore subordinate debt provision, it is not a new measure as it was already announced in the Budget.

This subordinate debt was to be provided by banks (as quasi-equity) and to be fully guaranteed through the Credit Guarantee Trust for Medium and Small Entrepreneurs (CGTMSE). In the measure announced on Wednesday, it states that CGTMSE will provide only partial credit guarantee support to banks. Hence more clarity is awaited on this. As such subordinate debt is more complex to implement than direct lending.

As regards the tweaking of the definition of MSMEs, this has been long awaited and recommended (by UK Sinha committee last year) and is not a new measure specifically to address Covid. The narrow definition of MSMEs laid down in the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act) — defined based on their investments in plant and machinery has been a key issue. Defining MSMEs based on turnover and investment is a welcome move as many countries such as China and UK follow such criteria. Also with the implementation of GST, turnover details are more easily captured.

The other measure on fund of funds is also not new and was already recommended by the UK Sinha led committee.

What for NBFCs/MFIs

While the RBI had announced targeted long-term repo (TLTRO 2.0) for banks to deploy in investment-grade bonds of NBFCs, (at least 50 per cent towards small and mid-sized NBFC/MFIs), it had seen weak response owing to banks’ risk aversion to the sector.

The government’s ₹30,000-crore special liquidity for investment grade NBFCs/MFIs with full government guarantee is hence a big positive. Not only will it nudge banks to lend to these entities but also expand their support to below A rated bonds.

Remember investment grade bonds are those that have rating of BBB and above. But banks were wary of investing in below A rated bonds owing to risk aversion and capital constraints. The government’s 100 per cent guarantee will help address these issues.

However it is important to note that there are about 9,568 NBFCs and MFIs, of which only around 380 are investment grade (BBB and above rating).

For AA and below rated debt papers of NBFCs/MFIs (even unrated), while the government has announced partial guarantee scheme of ₹45,000 crore, it covers only the first 20 per cent loss. Whether banks (with capital constraints) are willing to take this up needs to be seen.

Published on May 13, 2020
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