Small Industries Now Entitled To More Working Capital Credit
The Reserve Bank of India has advised banks to provide additional working capital to micro and small industries in the aftermath of the demonetisation. In a notification issued on Thursday, RBI asked banks to consider providing additional credit to small companies till March 31 to help them tide over the cash crunch following the decision to demonetise old Rs 500 and Rs 1,000 notes in November.
In a circular last year, the RBI had urged banks to consider extending additional credits to small and micro industries in the event of unforeseen or seasonal increase in demand of products produced by them.
In light of that circular, the central bank on Thursday said that it received reports of business owners facing difficulties after withdrawal of high-denomination currency notes, which prompted the decision.
Consequent upon withdrawal of legal tender status of Specified Bank Notes of Rs 500 and Rs 1,000 denominations and based on feedback that some MSEs are facing temporary difficulties in carrying out their normal business due to cash flow mismatches, it has been decided to review the above instructions.Reserve Bank of India Notification
The new instructions issued to banks advised them to use the above facility to extend more credit to industries in need due to “cash flow mismatches” and clarified that it will be only a one-time measure till March 31.
Accordingly, banks are hereby advised that they may use the facility of providing above ‘additional working capital limit’ (approved by their boards as above) to their MSE borrowers, to overcome the difficulties arising out of such cash flow mismatches also.Reserve Bank of India Notification
The cash crunch in the country has had an especially adverse impact on small industries and hit consumer demand. A BloombergQuint report found that small and medium industries in the Thane district in Maharashtra were struggling to secure working capital and pay salaries to employees. Industry experts have pointed out that there will be a downside risk to consumer demand in one or two upcoming quarters.
In its monetary policy statement released earlier this month, the central bank observed that the impact of the demonetisation on the economy will be transitory and transient, with the long-term benefits yet to be assessed.
Given these indicators of underlying inflation, it is appropriate to look through the transitory but unclear effects of the withdrawal of specified bank notes while setting the monetary policy stance. On balance, therefore, it is prudent to wait and watch how these factors play out and impinge upon the outlook.RBI Monetary Policy Resolution