Small Finance Banks Get Rs 10,000-Crore Facility For On-Lending To Small Businesses

In the wake of second wave of Covid-19 infections, the Reserve Bank of India announced a three-year special long-term funding facility for small finance banks to ensure lending support to micro and small businesses.

A Rs 10,000 crore targeted long term repo facility is being opened for small finance banks, RBI Governor Shaktikanta Das said while announcing fresh measures on Wednesday. Funds availed via this window can be used for on-lending of up to Rs 10 lakh per borrower.

Several Indian states have announced local lockdowns to battle a severe second surge of the pandemic, disrupting economic activity. The curbs threaten to hurt a nascent recovery after India recorded first contraction in more than four decades in FY21.

Small finance banks have been acting as the last-mile supply of credit to individuals and small businesses, Das said. The special window, he said, has been announced to provide further support to small business units, micro and small industries, and other unorganised sector entities who are adversely affected during the second wave of the pandemic.

The move, according to PN Vasudevan, managing director and chief executive at Equitas Small Finance Bank Ltd., would not help from a liquidity perspective but help them raise funds cheaper.

"It will help us ease lending to small business borrowers, who are largely underserved by the mainstream banks because of difficulties in their credit assessment," he said. "But, now it becomes much easier for us to help such borrowers bounce back from disruptions in their businesses due to the second Covid wave."

Besides reducing cost of funds for lending to small businesses, the RBI's dispensation also helps in extending credit to the self-employed, the worst-hit segment during the pandemic, according to Samit Ghosh, founder of Ujjivan Small Finance Bank Ltd.

Wider ‘Priority Sector’ Benefits

The RBI also extended the benefit of priority sector lending to loans given by small finance banks to a wider set of microfinance institutions.

"In view of the fresh challenges brought on by the pandemic and to address emergent liquidity position of small MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs with asset size of up to Rs 500 crore for on-lending to individual borrowers as priority sector lending," said Das.

The facility, he said, will be available to small finance banks up to March 31, 2022.

During the first Covid wave in India, the RBI in April last year had announced targeted long-term repo operations 2.0 to channel funds to non-banking financial companies via banks. The central bank had then offered Rs 50,000 crore through this facility, with half of that amount being set aside for small- and medium-sized non-bank lenders and microfinance institutions.

But smaller NBFCs and micro-lenders got limited relief from the move as banks remained risk-averse to lend to smaller NBFCs with a balance sheet size of less than Rs 500 crore, said an India Ratings report.

But that will not be the case now, said Vasudevan. "We understand the micro-finance space better as most small finance banks have evolved from there," he said. "This gives us incentive to lend to smaller and newer entities in the micro-finance space, which banks usually find it difficult to lend to."

Moreover, according to Ghosh, the priority sector status for such lending was a long-standing demand of small finance banks.