Festive boost: Credit limit for retail borrowers, small businesses hiked

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October 10, 2020 3:45 AM

Small businesses, professionals like doctors and chartered accountants, and high net-worth consumers will likely see a greater flow of credit ahead of the festive season.

Deposits might have remained stable during the last two fortnights but compared to last year’s levels, deposits growth was stronger.

Small businesses, professionals like doctors and chartered accountants, and high net-worth consumers will likely see a greater flow of credit ahead of the festive season, as the Reserve Bank of India (RBI) on Friday decided to allow lenders to raise their exposure to individual retail borrowers to Rs 7.5 crore from Rs 5 crore. Importantly, despite the higher threshold, the risk weight assigned to such loans has been retained at 75%, which will help reduce the cost of the extra credit amount. Under the extant guidelines, the 75% risk-weight is tied to certain conditions, including an individual exposure limit of Rs 5 crore.

Apart from individuals, businesses with an annual turnover up to Rs 50 crore will be covered. The elevated limit will apply to both fresh and incremental exposures. MSME industry executives said the central bank’s move will complement the government’s efforts in easing credit flow to individuals as well as MSMEs through official guarantee and soften the Covid-19 blows, although they also wanted the turnover limit of the firms to be raised as well. The move comes at a time when consumer demand, battered by the pandemic, is expected to pick up in the build-up to the festive season.

“This measure is expected to increase the much needed credit flow to the small business segment,” the RBI said in a statement after a meeting of the Monetary Policy Committee. While credit to industry grew 0.5%, year on year, as of August 28, against 3.9% a year before, loan flow to micro and small units dropped by 1.2%, even on a low base of -2.1%. Under priority-sector lending, credit to MSMEs grew by 5.4% as of August 28, compared with 6.1% a year earlier.

Already, the government announced a Rs 3-lakh-crore credit guarantee scheme, rolled out on June 1, to help small businesses and professionals tide over the Covid shock. As of October 5, lenders disbursed as much as Rs 1,36,140 crore under this so-called Emergency Credit Line Guarantee Scheme. According to Kotak Research, more than a half of the SMEs reported a year-on-year decline in revenue in FY20, with over 30% having reported revenue drop in excess of 10%.

This clearly shows the SMEs, which were already in deep trouble, saw their fortune plummet further after the Pandemic hit them hard.

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