Full guarantee may push banks to lend

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Risk-averse banks may now have the appetite to resume lending operations, with the government deciding to provide full guarantee for the loans extended by them to borrowers to kick start the economy paralysed by the COVID-19 lockdown.

Finance Minister Nirmala Sitharaman announced a ₹3 lakh crore emergency working capital facility for businesses, including micro, small and medium enterprises, as part of the ₹20 lakh crore financial package announced by Prime Minister Narendra Modi on Tuesday.

This 100% credit guarantee will mean that banks do not have to make any provision for the loans, that is, they do not have to set aside capital in case the account turns non-performing.

Bankers said they will wait for operating guidelines from the Reserve Bank of India (RBI) to understand whether the government will directly provide the guarantee or via agencies like the SIDBI. In case the government is directly providing the guarantee, there will be no risk weight attached to the loans. “The measures for MSMEs through guarantees, equity infusion and debt support will incentivise bank lending to MSMEs as well as providing crucial support to stressed entities in the current situation,” SBI Chairman Rajnish Kumar said.

Also read | Govt. may have to present second Budget to deal with COVID-19 aftermath, says Jairam Ramesh

On banks’ reluctance to lend, which is evident from over ₹8 lakh crore being parked by these lenders with the RBI’s reverse repo window, Ms. Sitharaman said a lot of borrowers were not fully drawing up to the sanctioned loan limits due to the lockdown. As a result, banks have no other option but to keep the funds with the RBI.

Liquidity for NBFCs

With the government announcing a ₹30,000-crore special liquidity scheme for NBFCs, which will be provided by the banks, the non-banking finance companies now expect bank funding to start. While announcing the scheme, the government said investment would be made in primary and secondary market transactions in investment grade debt paper of NBFCs, HFCs and MFIs. Such investments will be 100% guaranteed by the government.NBFCs expect that banks will now be more willing to tap the RBI’s special window for liquidity exclusively meant for them. Banks were reluctant to borrow in the first such auction — only about 50% amount was availed by them out of the notified amount of ₹25,000 crore. “Under the full and partial guarantee scheme, we expect a boost to liquidity into the NBFC ecosystem which, in turn, would help MSMEs to resume their operations,” said Umesh Revankar, MD and CEO, Shriram Transport Finance.

NBFCs also expect partial credit guarantee scheme will boost banks’ confidence to lend. The scheme will cover the borrowings of lower-rated NBFCs, HFCs and micro finance institutions (MFIs) and the government will provide 20% first loss sovereign guarantee to public sector banks. “The special liquidity support to lower-rated NBFCs will mean banks do not have to take credit risk and NBFC papers are likely to be lapped up,” said Sanjay Chamria, VC & MD, Magma Fincorp.

Rating agency Crisil, however, warned of the increase in risk for banks arising out of their MSME portfolio.

“₹3 lakh crore complete guarantee scheme will provide a much-needed push to credit disbursement to cash starved MSMEs. However, the risk of credit culture deteriorating will remain a monitorable, as bankers would have no skin in the game and hence adhoc disbursement may increase risk,” said Isha Chaudhary, Director, CRISIL Research.

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