Opinion | How government backstops can best ease credit flows to MSMEs4 min read . Updated: 08 Jun 2020, 10:25 PM IST
India’s loan guarantee schemes for small businesses could do with a few tweaks to enhance lending
The Indian government has set into motion the implementation of several schemes that are aimed at improving both the liability and asset sides of the balance sheets of banks and non-banking financial companies (NBFCs), so that lending to the real economy can increase. The most recently introduced are four schemes. The first guarantees 100% of fresh loans to existing micro, small and medium enterprises (MSME) borrowers up to a total of ₹3 trillion. The second guarantees 10% of existing eligible loans of NBFCs or housing finance companies (HFCs) originated before the lockdown and purchased by banks. Both these are for ticket sizes up to ₹5 crore. The third guarantees 100% of fresh and existing investment-grade paper of NBFCs up to ₹30,000 crore through direct purchases by the Reserve Bank of India (RBI). The fourth guarantees 20% of public sector banks’ purchases of fresh issuances of lower or unrated debt of NBFCs/HFCs, including micro finance Institutions, in the next three months.
The largest among these schemes is the 100% Emergency Credit Line Guarantee Scheme (ECLGS) in the form of a guaranteed emergency credit line (GECL) facility. This scheme consists of a four-year credit line with a price cap to be extended by lenders willing to lend their existing MSME borrowers fresh money up to 20% of the loan outstanding, if such a loan is extended any time before the end of October 2020, or until the overall ₹3 trillion limit is reached. Whether or not the borrower can repay, the lender can rest assured that its loan book won’t take a hit. If the loan were to go bad, it would be absorbed by the National Credit Guarantee Trust Company (NCGTC), the government’s scheme manager. This scheme, therefore, can kickstart credit flows to the MSME sector by lenders.
The ECLGS scheme is straightforward to implement, provided it has adequate budgetary support to meet invoked guarantees. Currently, ₹41,600 crore has been allocated. Since the scheme is available till October 2020, any loan defaults can be expected to come in starting February 2021. Of such claims, 75% would be paid within 30 days. The remaining 25% would be paid after the lender completes recovery proceedings.
Lenders are thus incentivised to an extent to follow up with the borrower for timely repayments and to undertake recovery proceedings. But, this may prove inadequate to get lenders to block capital for such lending activity, and may need an additional upfront guarantee of, say, up to 90%.
Operational steps such as ascertaining the total outstanding credit of an enterprise will require checks across credit bureaus by each lender, and this could delay the impact of this facility on disbursals. Another feature that could delay deployment is the rule that only up to 20% of current exposure to an MSME can be lent without getting a No Objection Certificate (NOC) from existing lenders of the said borrower. If the lender has adequate lendable funds and is willing to lend beyond its 20% exposure, NCGTC can consider doing away with the NOC, particularly for ticket sizes less than ₹1 crore, given that the largest ticket size possible under the scheme is far higher, at ₹5 crore.
Further, an existing MSME customer that’s not a borrower of a recognized lending institution, especially if this customer has had a good record of repayment, should also be allowed to borrow money under the scheme. The scheme appears to be open to only those who have current outstandings. It should be open to current MSME customers and not just current borrowers.
A 14% interest cap on NBFCs under this scheme could make it difficult for them to participate even if they have focused on lending to eligible MSMEs. There are two reasons for this. One, given the compulsory 1-year moratorium before repayments start, NBFCs will need to price in refinancing costs within that price cap, since they cannot raise a 4-year debt in the current environment. Two, NBFCs may have major challenges with their asset-liability management on account of existing borrowers availing RBI’s moratorium.
In this regard, the last two guarantee schemes that support the liability side of NBFC balance sheets are noteworthy. The first of them involves RBI, for the first time, directly purchasing (at least) investment grade paper of NBFCs/HFCs through a special purpose vehicle. However, since this is only for up to 3-month maturity paper, it may be insufficient to boost the sector’s confidence that the government has their back. To signal support that’s more meaningful, the scheme could be expanded to paper of up to 1-year residual maturity at least, especially because the Partial Credit Guarantee Scheme already accommodates paper of maturity between 9 and 18 months. Also, if NBFCs are to extend moratoriums to their clients for six months, they will need to find ways to rollover their paper in three months at market rates.
The regular monitoring of these schemes, a willingness to change design elements based on feedback, and a disclosure of their performance in meeting the stated objectives are essential to help the economy get back up on its way to becoming self-reliant.
V. Anantha Nageswaran and Deepti George are, respectively, member of the Economic Advisory Council to the Prime Minister and head of policy at Dvara Research. These are the authors’ personal views