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Govt should raise credit guarantee to PSU banks from 10% to 40% to boost NBFC lending to MSMEs

Sandeep Soni

The government offer of one time six-month partial credit guarantee to public sector banks (PSU) for first loss of up to 10 per cent for buying non-banking financial companies (NBFCs) pooled assets up to Rs 1 lakh crore should be increased to 30-40 per cent, Animesh Saxena, President, Federation of Indian Micro and Small & Medium Enterprises (FISME) told Financial Express Online. The Ministry of Finance had last week launched the Partial Credit Guarantee scheme for purchase of pooled assets of financially sound NBFCs worth Rs 1 lakh crore during the current financial year. The announcement came after the Finance minister Nirmala Sitharaman had said in her budget speech for providing the partial credit guarantee to such NBFCs.

“It should be 30-40 per cent. 10 per cent is not enough as it will not encourage banks much for lending to MSMEs because they have seen last two-three years balance sheets of MSMEs being badly hit due to issues like slowdown, demonetisation, GST, payment defaults etc. So they will need some more security,” said Saxena.

Also read: Credit disbursal to MSMEs very poor despite 59-minute loan scheme, says FISME

NBFCs have been a dependable source of financing for MSMEs “until last year or so when the source of funding started drying up. So if liquidity improved for NBFCs then it will help MSMEs with credit flow even as PSU banks have still not improved upon lending to MSMEs,” he added. While the government has been supporting lending to MSMEs by asking banks to for the same, the total credit outstanding of public sector banks to the sector saw only a marginal increase of 7.38 per cent from Rs 8.20 lakh crore in FY16 to Rs 8.81 lakh crore in FY19. For FY17 and FY18, the amount stood at Rs 8.28 lakh crore and Rs 8.64 lakh crore respectively, as per the RBI data.

The government’s launched in November last year to offer credit to MSMEs for in-principle approval for a term loan or working capital loan up to Rs 5 crore hasn’t seen much disbursal. The portal received 2,00,660 loan applications out of which 1,59,583 were accorded in-principle approval since the launch of the portal and 1,33,448 applications were sanctioned, according to Anurag Thakur, minister of state for finance who informed the Rajya Sabha last month. Earlier this month, MSME minister Nitin Gadkari had also stressed on the subject in a meeting with the finance minister Nirmala Sitharaman and India Inc’s top leaders.

“The actual conversion is very low for the 59-minute scheme. So the government has realised that NBFCs as a source of funding to MSMEs has to be revived. Banks are so scared of NPAs that they are not going to relax norms for MSME lending. The government will have to revive this source of funding as MSMEs are a huge job creator and they know that only PSU banks can help in doing so,” said Saxena.

Since September 2016, share of NPAs in micro-enterprises went down marginally from 8.6 per cent to 8.5 per cent in September 2018 while for SMEs it increased slightly from 10.6 per cent to 11.3 per cent vis-a-vis 15.2 per cent to 18.4 per cent in the mid-segment and 12.9 per cent to 20 per cent between the given period, according to a UK Sinha committee report submitted in June this year on MSMEs.