New Delhi: The government and the Reserve Bank are contemplating to open a special Rs20,000 crore refinance window to boost growth of small and medium enterprises (SMEs), which are facing credit crunch.
The special refinance window will encourage banks to lend funds to SMEs as the facility would be made available at a concessional rate, a finance ministry official said.
The details of the scheme including the interest rate are being worked out and is likely to be announced by the central bank in the next 10-15 days, he added.
The facility would help meet the twin objectives of giving much required liquidity boost to the sector and at the same time help banks in meeting the mandatory 40% priority sector lending target.
In addition to lack of credit, the SME sector is also suffering from low demand of their goods in the domestic market as well as for exports which have fallen by 15% in October.
Besides, helping the small and medium enterprises in getting funds at cheaper rates, the scheme will ensure that banks maintain their interest margin even after lending the funds to SMEs below the benchmark Prime Lending Rates (PLRs).
Under the refinance facility, the banks can borrow funds from the central bank concessional rates to on lend funds to the small enterprises.
Since the beginning of the liquidity crisis in middle of September, banks have shown their reluctance in providing credit to the SME sector on fears that loans would turn bad.
As part of the liquidity injection exercise, the RBI had already opened a special window of Rs20,000 crore to help the mutual fund industry which is facing redemption pressure.
Under the special window for MFs, banks have being encouraged to borrow funds at the prevailing short-term (repo) rate for on lending to mutual funds industry.
Like other sectors in the economy, the mutual funds industry has been facing huge redemption pressure following large scale withdrawal of funds.
RBI since October has injected as much as Rs2.75 lakh crore in the system using various monetary instruments like reduction in the mandatory deposit that banks keep with the central bank and Statutory Liquidity Ratio (SLR), the amount that banks have to park in government securities.
While the Cash Reserve Ratio (CRR) was reduced by 350 basis points since October, the SLR was lowered by 100 basis points.
Besides, the RBI also lowered the short-term (repo) lending rates by 150 basis points signalling soft interest rate regime.
However, releasing liquidity at a time when the confidence level is down is not enough and it is also necessary that banks take appropriate risk and lend money to the industry.
Finance Minister P Chidambaram had said, “Liquidity is the first step, price is the second step, the third step is credit delivery. Now banks are ready to deliver credit and we will prevail upon them to get over their risk aversion.”