Home / Industry / Banking /  Risk-averse lenders may derail govt's plan to rescue small businesses

MUMBAI: Growing risk aversion among lenders could become a worry for the government which plans to rescue cash-starved small businesses through 3 trillion of collateral-free loans along with 20,000 crore of subordinate debt.

While the 3 trillion of loans are entirely guaranteed by the government, the subordinate debt for stressed small businesses has a partial credit guarantee, where lenders may not be too keen to tread. Experts also said that private banks will be more careful in choosing assets under the scheme than their public sector counterparts.

For instance domestic banks, have been parking over 7 trillion daily with the Reserve Bank of India (RBI) for quite some time now, stashing a whopping 7.83 trillion on 14 May under the reverse repo operations of the central bank, at a paltry rate of return of 3.75%. This despite two reverse repo rate cuts aimed at deterring banks from using this window for excess funds instead of lending. The first reverse repo cut happened on 27 March and the next on 17 April. While banks parked 7.09 trillion on 17 April, it was at 4.43 trillion on 27 March.

“The collateral free loans as well as the subordinate debt schemes to support the micro, small and medium enterprises (MSMEs) are positive from the MSME perspective, but rely significantly on the banking as well as the non-banking financial company (NBFC) sector to provide the funding," Care Ratings said in a report published on 14 May.

These institutions, Care Ratings said, have recently turned risk averse, reflected in the slowing credit disbursal ratio as well the parking of excess liquidity with RBI. The report said that due to these announcements, including moratorium advised to lenders, MSME bad loans may come in lower in the current year, but could witness a spike in the next year, especially if the business environment remains challenging.

Total exposure to small businesses with loans of up to 25 crore is estimated at 16.4 trillion, of which public sector banks have a share of 48.2%, private sector banks are at 38.9% and the rest is from non-bank financiers.

“With an increase in limits for definition of MSMEs and likely achievement of that process, the overall current exposure to MSMEs is likely to increase substantially," the Care report said.

A banker with a public sector bank said on condition of anonymity that this scheme was suggested by lenders and will definitely lead to increased credit flow as there is a clear backing from the government. "Now that we have a sovereign guarantee on these loans, there is no risk for us to lend to MSMEs," he said.

According to analysts at Emkay Research, while the intention of government guarantee on small business loans is to encourage lenders to accelerate credit facilities, most of the large private lenders will continue to remain conservative, considering a political risk and future risk to the balance sheet.

Some also believe that since small businesses are somewhat unorganised, it will not be easy for bank funds to reach them. “The unorganised nature of the segment is the key challenge to reach out to these entities, especially those facing existentialist challenges," said Sujan Hajra, chief economist, Anand Rathi Share and Stock Brokers Ltd.

Citing data from the Ministry of Micro, Small & Medium Enterprises (MSME), Hajra said the total number of small businesses in India is at 13.1 million. “The NSSO estimated the number of unincorporated non-agricultural and non-construction entities at 63.4 million in 2016. The large divergence is because NSSO data includes household industries which are not registered with the ministry," said Hajra.

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