The announcement comes at a time when the Budget failed to extend the ₹3 lakh crore emergency credit line guarantee scheme for stressed MSME borrowers
In a push to ensure more credit to small businesses, the Reserve Bank of India (RBI) has exempted banks from keeping the cash reserve ratio (CRR) requirement against loans disbursed to first-time borrowers of micro, small and medium enterprises (MSMEs).
In its statement on development and regulatory policies, RBI said MSMEs that had not availed of any credit facility as of 1 January can be considered for this exemption. This includes exposures of up to ₹25 lakh per borrower for credit extended up to the fortnight ending 1 October 2021.
“In order to incentivise new credit flow to the MSME borrowers, scheduled commercial banks will be allowed to deduct credit disbursed to ‘new MSME borrowers’ from their net demand and time liabilities (NDTL) for calculation of CRR," RBI said.
According to State Bank of India chief economist Soumyakanti Ghosh, the exemption should result in disbursements of ₹2.33 trillion of fresh loans to MSMEs by the end of September 2021. Banks could save CRR of ₹8,000 crore from fresh loans to MSMEs.
“While the credit to MSMEs have improved in FY21, the same is supported by emergency credit line guarantee scheme (ECLGS) to existing borrowers of the banks. The proposal could incentivize banks to consider lending proposals for fresh credit to new MSMEs, however, the actual offtake could be muted given the continued risk aversion of lenders and limited impact on costing from CRR exemption," said ICRA rating agency.
In February 2020, RBI exempted banks from maintaining CRR for loans to all MSMEs for five years, if these loans were disbursed between 31 January and 31 July 2020. CRR is the slice of deposits that banks have to park with RBI. Currently, it is at 3% of banks’ deposits. Banks don’t earn any interest on CRR.
The announcement comes at a time when the budget did not announce the extension of the ₹3 trillion ECLGS for stressed MSME borrowers. The scheme is set to expire in March 2021. Banks and non-banks have sanctioned 76.6% of the funds allocated under the scheme, which offered small businesses loans of up to 20% of their entire credit outstanding as on 29 February. Initially, the Centre said companies with ₹100 crore turnover and ₹25 crore outstanding will be eligible for the scheme, but the cap on turnover was lifted in November.