RBI’s relief measures for MSMEs: 4 key takeaways from Shaktikanta Das speech; experts opine mixed bag

RBI on Wednesday permitted SFBs to classify fresh lending to smaller MFIs with asset size of up to Rs 500 crore for on-lending to individual borrowers as priority sector lending.

Ease of Doing Business for MSMEs: In an attempt to jumpstart micro, small, and medium enterprises (MSME) in the country reeling under the second wave of the Covid impact, Reserve Bank of India Governor Shaktikanta Das on Wednesday announced multiple relief measures. The support largely centered around easing credit concerns for MSMEs, small businesses, and individuals. “Small businesses and financial entities at the grassroot level are bearing the biggest brunt of the second wave of infections. Against this backdrop and based on our continuing assessment of the macroeconomic situation and financial market conditions, we propose to take further measures,” Das said in his unscheduled address.

In order to incentivise credit flow to MSMEs, RBI in February this year had allowed scheduled commercial banks to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR). Das, on Wednesday, extended this exemption, which is currently available for exposures up to Rs 25 lakh and for credit disbursed up to the fortnight ending October 1, 2021, till December 31, 2021 “order to further incentivise the inclusion of unbanked MSMEs into the banking system.”

“This is a very good incentive for the banks to promote lending to the MSME sector. Our demand is for the continuation of the restructuring process which ended on March 31 and to also include SME I units to benefit from it. Government should step in to stop the rot caused by this second wave of this pandemic. The future of many MSME units stands in jeopardy. The takeover should be smooth while banks and government procedures should be tweaked accordingly and quickly,” Manguirish Pai Raikar, Chairman, National Council for MSME, Assocham told Financial Express Online.

Das also allowed individuals, small businesses, and MSMEs with loans up to Rs 25 crore and who had not availed restructuring under any of the earlier restructuring frameworks including under the Resolution Framework 1.0 as of August 6, 2020, and who were classified as ‘Standard’ as on March 31, 2021, to be eligible “to be considered under Resolution Framework 2.0.” Borrowers can avail one-time restructuring under the proposed framework till September 30, 2021. “As it is for those classified as standard as of March 31, 2021, limited number of small businesses and MSMEs could stand to benefit from this measure,” Kavita Chacko, Senior Economist, CARE Ratings told Financial Express Online.

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On the other hand, for individuals and small businesses who have already availed loan restructuring under the 1.0 framework, RBI said that lending institutions can increase the moratorium period or residual tenor up to a total of 2 years. “Extension of the timeline of two years should have been extended to MSMEs as well, their revival plans would have been severely impacted. However, providing a second restructuring chance to MSMEs and small businesses, which could not avail the benefit earlier or are now in fresh need, is a welcome move. The success of this will depend on the support from the banks for the benefits to flow,” Maulik Sanghavi, Partner – Resolution Advisory, BDO India told Financial Express Online.

The central bank also said that it would conduct special three-year long-term repo operations (SLTRO) of Rs 10,000 crore at repo rate for small finance banks (SFBs) in order to provide further support to small business units, micro and small industries, and other unorganised sector entities adversely affected during the current wave of the pandemic. The facility would be deployed for fresh lending of up to Rs 10 lakh per borrower and would be available till October 31, 2021.

“In the current times, when unprecedented Covid is becoming unstoppable and affecting small businesses in the meanest way, such measures can provide some relief to them and help them in reviving and surviving to some extent. However, the extent of lending could have been more reasonable and the period of the facility may require reconsideration for some extended period while seeing the current trend of the peaking of Covid,” Deepak Thakur, Partner, L&L Partners told Financial Express Online.

RBI on Wednesday also permitted SFBs to classify fresh lending to smaller MFIs with asset size of up to Rs 500 crore for on-lending to individual borrowers as priority sector lending. “At present, lending by SFBs to MFIs for on-lending is not reckoned for priority sector lending (PSL) classification,” said Das. The relief would be available up to March 31, 2022.

“Today’s announcement is very disappointing. The alternative to moratorium through loan restructuring for accounts which are ‘standard’ as of March 31 only will deprive many self-employed and MSEs to avail this benefit. Plenty of enterprises engaged in tourism, automobile, restaurants, etc., have been left out. Priority sector category and a higher allocation of additional loans alone can’t be a solution at this moment. What is required is the comfort of reduction in the cost of finance,” K.E. Raghunathan, Convenor, Consortium of Indian Associations told Financial Express Online.