Recently RBI announced that MSMEs Loans to Get ‘Risk-Free’ Tag. Wh...

  Jun 03, 2020

Recently RBI announced that MSMEs Loans to Get ‘Risk-Free’ Tag. What does that mean for MSMEs and how would it help them?

  1. The Reserve Bank of India (RBI) is likely to allow banks to assign zero risk weight for loans that will be extended to the Micro, Medium and Small Enterprises (MSMEs) under the Rs.20 lakh crore economic package announced by the Union government.
  2. After banks highlighted the issue of risk weight associated with the loan with the government, the government has asked the RBI to waive the requirement of assigning a risk weight to the loans.
  3. Zero risk would mean that banks will not have to set aside additional capital for these loans.
  4. The move will encourage lenders to extend credit, as banks have turned risk averse and have been reluctant to lend.
  5. The earlier issue was that the claims under the package were not to be settled unconditionally rather the government will ask questions and see the loan appraisal process once a claim is made when the borrower defaults.
  6. And, if the claim is not settled, banks have to make provision in line with the age of default.
  7. This has made banks averse to lending to MSMEs.
  8. Under the scheme, 100% guarantee coverage will be provided by the National Credit Guarantee Trustee Company Limited (NCGTC) to eligible MSMEs, in the form of a Guaranteed Emergency Credit Line (GECL) facility.
  9. Though primarily meant for the MSME sector, other small borrowers including the Non-banking Financial Companies (NBFCs) can also avail themselves of the scheme.
  10. The tenure of loan under this scheme is four years with a moratorium period of one year on the principal amount.