MSME credit woes: Solving NBFCs’ liquidity crisis is critical for small businesses’ access to capital

December 11, 2019 1:37 PM

Credit and Finance for MSMEs: Improved liquidity for NBFCs would be a much-needed boost for the MSME sector as NBFCs provide significant funding to this segment of borrowers.

The partial enhancement scheme is expected to provide much-needed relief to NBFCs and HFCs.

By Gaurav Kumar

Credit and Finance for MSMEs: The securitisation market in India has made rapid strides in recent years with transaction volumes growing from Rs 84,000 crore in FY 2018 to Rs 2.0 lakh crore in FY 2019. The buoyancy continued in H1 FY 2020 with transaction volumes of more than Rs 1 lakh crore. The market is poised to reach an all-time high in the current fiscal. The government’s partial credit guarantee (PCG) scheme introduced in August 2019 shall add further impetus to the growth of the market.

The partial enhancement scheme is expected to provide much-needed relief to NBFCs and HFCs that are reeling under the on-going liquidity crisis in the financial markets. It provides an opportunity to better managed and retail-focused NBFCs to raise duration-matched funds through securitisation of pooled assets, and in turn fix their liquidity/ ALM gaps.

Key Features

The PCG scheme is valid for a period of six months from the date of the circular or till the time PSBs complete acquisition volumes of Rs. 1.0 lakh crore. The guarantee shall be limited to an extent of 10 per cent and valid for a period of two years from the date of purchase of pool. All fully disbursed secured loans (gold loans, vehicle loans, equipment loans, secured SME loans, housing loans etc.) originated prior to March 31, 2019, and with a ticket size of up to Rs 5.0 crore are covered under the scheme. The seller should be financially sound with capitalisation in excess of the regulatory requirement (15 per cent for NBFCs and 12 per cent for HFCs), net NPAs of less than 6 per cent, and profitable at least once during the previous two years.

SIDBI shall act as the nodal agency on behalf of the government for the scheme. A claim under the guarantee can be made by the bank to an extent of overdue amount against more than 90-day overdue contracts. As per the guarantee terms, the GoI shall be obligated to settle the claims within a period of five days from receipt of such claims.

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Benefits

Improved liquidity for NBFCs would be a much-needed boost for the MSME sector as NBFCs provide significant funding to this segment of borrowers. MSME sector has a significant impact on India’s economy with around 32 per cent contribution to GVA, around 48 per cent contribution to exports and providing jobs to more than 11 crore workers. MSMEs have been starved for funds despite several efforts taken by the government to revive the sector. The liquidity squeeze is on the back of events like demonetisation and GST roll-out that also had a crippling impact on the sector. NBFC credit has fallen by more than 30 per cent in FY19 that has also impacted consumption demand in sectors like auto, housing and consumer durables.

The scheme has come as a timely boon for the cash-starved NBFC sector. Even prior to the scheme, the preference of public sector banks has been to acquire retail assets from NBFCs through the DA route as opposed to providing funding through term loans or the PTC route. Banks are now incrementally inclined to take exposures through DA under the GoI PCG scheme as they get the same advantages of erstwhile DA transactions coupled with significant credit protection owing to transaction-level credit enhancement and the government guarantee.

Prior to the scheme, the PSBs were largely restricting their exposures to large entities with a strong credit profile (rated in AA category and above). Armed with higher credit comfort (owing to credit enhancement), banks are now willing to come down the credit curve and consider the purchase of pools from small and medium-sized entities as well (i.e. entities rated in BBB/ A category, with AUM of Rs 500 crore and above).

Progress so far

More clarity is required on documentation (including the guarantee format) and operational aspects like the priority of utilisation and subsequent replenishment of the credit enhancement (whether the transaction level credit enhancement from the originator or the government guarantee shall be utilised first as both credit supports are first loss in nature). While large amounts have been sanctioned by PSBs under the scheme, only a handful of transactions have been consummated till date. Nonetheless, significant traction is expected once there is clarity on the aforesaid issues, which is expected shortly. The market also believes that the scheme validity period may be extended by the government if the liquidity situation in the NBFC sector does not improve in the near term.

(Gaurav Kumar is the Founder and Director at Vivriti Capital. Views expressed are the author’s own.)

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