Stimulus 2.0: Banks will monitor solvency, guarantees cool credit risk fear

Banks expect faster disbursement of sanctioned money to micro, small and medium enterprises (MSMEs) after the lockdown is lifted, with the fear of money coming back being addressed in the form of guarantees.
 

While the issue of providing liquidity to existing borrowers who are sapped of revenues has been addressed, banks will have to undertake due diligence on the solvency of units, said bankers.
 

Public and private sector bankers said the government was setting bigger goals, and with the present disruption, the challenge was beyond just providing money to address immediate liquidity concerns. It has been a blow to units across supply chains, and hence banks have to examine the viability of units over a longer period.

These are collateral-free loans. Yet, prudent norms will have to be followed, including repayment within the scheme’s parameters. This is not a free flow of money. Credit guarantees will kick in when defaults happen.

A senior SBI executive said the bank had recommended for a single rate within each bank or NBFC, to make the loan facility simple. According to SBI’s analysis, lenders will get 100 per cent credit guarantee on principal and interest, which will save capital of Rs 25,000-30,000 crore for banks (zero-risk weight).

The increase in credit disbursal will translate into direct credit growth of 20 per cent to eligible accounts. As of March 20, around Rs 14 trillion was outstanding for the MSME sector, which translates to Rs 2.8 trillion immediate credit boost, said SBI.
 

On Wednesday, the government announced Rs 3 trillion collateral-free automatic loans for businesses, including MSMEs. Under this, banks and NBFCs will extend up to 20 per cent of the entire outstanding credit as on February 29, 2020.

MSMEs have been severely impacted by the outbreak, and will need additional funding to meet operational liabilities, buy raw material, and restart operations. Close to 4.5 million units can resume business activity and safeguard jobs, with the help of these loans.
 

Borrowers with up to Rs 25 crore outstanding and Rs 100 crore turnover are eligible for access. These loans will have a 4-year tenor, with a moratorium of 12 months on principal repayment. The interest will be capped on loans. Senior bank executive said lenders will only look to cover the cost of funds, and mark up for administrative expenses as these loans will have full credit guarantee cover on principal and interest. Lenders will not levy a guarantee fee or ask for fresh collateral.
 

CIBIL, in its review, said MSMEs continue to have the lowest default rate in commercial lending. Default rates across all MSME segments are lower than large corporate NPAs. The gross non-performing asset ratios for the micro segment of MSMEs have remained stable. Within micro loans, loans of less than Rs 0.1 crore in ticket size have seen a reduction in default rates.