Amid a raging debate on the need for easing rules governing credit to MSMEs, an analysis of RBI data on such loans shows that a large majority of banks, including those facing ‘prompt corrective action’, have achieved the mandatory priority sector lending target for micro enterprises.
The MSME lending has also been exempted from most of the restrictions, including those relating to stressed assets, and several steps have been taken by the RBI to ease credit flow to this sector, bank and industry officials said.
While much has been written about the “so-called differences” between the Reserve Bank of India (RBI) and the government, including on issues like management of surplus reserves of the central bank and the credit flow to MSMEs, officials said facts and the data show there are hardly any significant issues that are being faced by these small enterprises due to policy or regulatory matters.
“There may be a short-term dip in the rate of growth for the credit flow to MSMEs, but that should not be seen as an actual decline in lending extended to them and even a slowdown in the expansion rate is very much transient in nature that would get reversed with a faster formalisation process underway for the sector,” a top banker said citing the data and regulations that favour the MSME sector.
The officials also said all these steps have been taken jointly by the government and the regulators after an extensive and continuous consultation process.
The officials declined to be named here given the sensitivity of the matter and continuing controversy over the RBI-government relations.
They cited several steps taken in the recent past by the RBI, in consultation with the government, for facilitating easier access and availability of credit, including the ‘Resolution of Stressed Assets-Revised Framework (RSA-RF)’ of February 12, 2018, to the MSME sector.
While some corporate firms have criticised this framework, the officials alleged the opposition is mostly coming from those who were misusing the earlier rules for ‘ever-greening’ of their loans.
This framework has been carefully calibrated to exclude loans of up to Rs 25 crore availed by MSME units from its purview, which nearly covers the entire spectrum of the MSME borrowers. Besides, this remains in line with the earlier government policy for the benefit of MSMEs.
The average outstanding loan size of the MSMEs being Rs 2.7 lakh, Rs 26 lakh and Rs 92 lakh respectively, almost all the MSME loans are out of the purview of the February 12 circular, while the earlier ‘specially carved out’ rectification process for the MSME sector remains in force.
The officials also pointed out the inclusion of a separate sub-target of 7.5 per cent under priority sector lending for the micro sector, which required the target to be met in a phased manner.
This target has also been made mandatory for foreign banks with 20 or more branches in India with effect from this year. Earlier, the target was applicable only to domestic banks.
The data shows that the target has been achieved by most domestic public sector banks, including those under the PCA.
Out of the 12 banks, including the one from the private sector under PCA, 10 have achieved the target as on March 31, 2018. Among the 10 public sector banks outside the PCA, eight has achieved the target. Besides, 15 out of 20 private sector banks have also met this target already.
To provide the much-needed credit to the priority sector in general and MSME sector in particular, the RBI has also permitted all scheduled commercial banks to co-originate loans with non-deposit taking, systemically important non-banking financial companies for the creation of priority sector assets.
This step is expected to improve the reach of the banks to the last mile MSME units without sacrificing the loan appraisal parameters. This is also expected to lower the borrowing cost for the end-user MSME beneficiary because.
The co-origination model also enables the NBFC customers, including the MSME customers, to access the more robust grievance redressal mechanism of banks.
Besides, caps have been removed on bank loans for lending to the MSME sector to encourage banks to go beyond the earlier limits.
To ensure timely availability of funds to the MSME sector, the RBI also facilitated the setting up of electronic bill factoring exchanges in the country. These exchanges provide for a swift discounting of MSME bills and help MSMEs raise funds without delay.
With the recent announcement made by prime minister Narendra Modi that all corporate firms with an asset size above Rs 500 crore must come on to TreDS platform (Trade Receivables Electronic Discounting System), it is expected that the exchanges will get a major traction thereby benefitting the MSME sector significantly.
The non-performing assets (NPAs) norms have also been relaxed for the MSME sector to help them cope up with challenges following implementation of new reforms, officials said.
To ensure formalisation of MSMEs, exposure of banks and NBFCs to the GST-registered MSMEs has also been permitted to be classified as a standard asset.