The Reserve Bank of India (RBI) is likely to permit banks to assign zero risk weight for loans extended to the Micro, Small and Medium Enterprises (MSMEs). This move is in response to the Rs.20 lakh crore economic rescue package announced by the Indian government.
A Component of the Economic Package
Within the economic package, a Rs.3 lakh crore loan has been designated for the MSME sector. However, under normal circumstances, these loans would attract a minimum risk weight of 20% as they lack direct government guarantee. Once a claim is made when the borrower defaults, the government will investigate the loan appraisal process. If the claim is not settled, banks have to make provision in line with the age of default.
Similarity to CGTMSE Loans
This facility is akin to loans guaranteed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The government has provided a fund of Rs. 41,600 crore for the Rs. 3 lakh crore scheme and expects less than 15% non-performing assets.
Waiver of Risk Weight
The government has requested the RBI to waive the requirement of assigning a risk weight to these loans following concerns raised by banks. This will mean that banks wouldn’t need to set aside extra capital for these loans, making them more inclined to extend credit. This is especially pertinent as many banks have become risk averse and hesitant to lend.
About the Rs. 3 Lakh Crore Scheme
According to this scheme, 100% guarantee coverage will be provided by the National Credit Guarantee Trustee Company Limited (NCGTC) to all eligible MSMEs via the Guaranteed Emergency Credit Line (GECL) facility. Although primarily intended for MSMEs, other small borrowers, including Non-banking Financial Companies (NBFCs), can also avail themselves of this scheme. The tenure of the loans under this scheme is four years, with a one-year moratorium period on the principal amount. This scheme is applicable to all loans sanctioned under GECL until 31st October, 2020 or till an amount of Rs.3 lakh crore is sanctioned, whichever comes first.
CGTMSE and Credit Offering
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was established by the Government of India and the Small Industries Development Bank of India (SIDBI). CGTMSE introduced a new “Hybrid Security” product which allows guarantee cover for the portion of the credit facility not covered by collateral security. In this partial collateral security model, Member Lending Institutions (MLIs) are allowed to obtain collateral security for part of the credit facility, while the remaining part, up to a maximum of Rs. 200 lakh, can be covered under the Credit Guarantee Scheme of CGTMSE.
National Credit Guarantee Trustee Company Limited (NCGTC)
National Credit Guarantee Trustee Company Limited (NCGTC) is a Union Government Company, established to manage and operate various credit guarantee trust funds. It is classified as a company limited by shares and it was set up by the Government of India.
