RBI Panel On MSMEs Suggests Larger Mudra Loans, Scrutiny Of Credit Guarantee Schemes

A Reserve Bank of India appointed committee has recommended that loan limits under the Micro Units Development and Refinance Agency Ltd. scheme be raised to Rs 20 lakh from Rs 10 lakh currently. It also suggested that loans upto Rs 5 crore be eligible for online sanction via PSBloansin59minutes.com.

The committee, set up to look at various issues being faced by micro, small and medium enterprises, was headed by former Securities and Exchange Board of India chief UK Sinha. The committee’s report was made public by the RBI on Tuesday.

Increased Loan Limits

Among the key suggestions made by the committee is an increase in the limit for uncollateralised loans to Rs 20 lakh from Rs 10 lakh currently. These are loans which are not backed up any collateral, such as land or machinery.

An increase in this limit would mean that the upper limit for loans given under the Pradhan Mantri Mudra Yojana can also be doubled to Rs 20 lakh, suggested the committee. However, it added that the Mudra scheme may need to be reworked to ensure that larger loan approvals don’t lead to an increase in bad loans.

The committee also suggests more digital approval of loans.

It suggests that the maximum limit on loans granted through the PSBLoansIn59Minutes portal should be raised to Rs 5 crore from Rs 2 crore currently. Moreover, loans granted under the government’s StandUpIndia and Mudra schemes should be routed through the PSBloansin59minutes portal.

Once again, safeguards have also been suggested for the portal.

“Banks need to ensure that all applications accorded in principal approval are disposed of within a period of 7-10 days. Algorithms leading to initial in-principle sanction but final rejections by the banks’ need to be reviewed in a time bound manner,” the committee said.

The access to larger ticket loans itself will not make a difference, said Girish Gupte, former head of the SME Chamber of India and currently an independent consultant. “The committee unfortunately has not looked at rate transmission and how lenders fix the rate of interest for SMEs, who understandably do not have adequate data/documentation or are in the informal sector,” Gupte said.

Adjusted Priority Sector Norms

The committee has recommended that banks be allowed to create flexible loan options for MSMEs in different sectors based on their specific business model.

To aid this, an ‘Adjusted Priority Sector Lending’ or APSL mechanism can be introduced, wherein additional weightage is given to lending to the more underserved sectors and districts. The committee recommends that the APSL framework be tried out in phases

Under the current guidelines, banks can invest in securitised PSL assets if the all-inclusive interest charged to the ultimate borrower does not exceed Base Rate + 8 percent. The committee recommends that this criteria be changed to Base Rate + 12 percent.

Should this recommendation be accepted, the Government, through the MSME Ministry, is likely earmark specific sectors which will get a higher weightage for banks or non-banks to provide loans under their PSL criteria, said Saikat Roy, Director and Head of SME Division, Care Ratings Ltd.

Scrutiny And Strengthening Of Credit Guarantee Schemes

Importantly, the committee also recommends greater scrutiny of credit guarantee schemes. For some time now, it has been feared that credit guarantee schemes are not adequately regulated, which could lead to trouble in the event of any large scale default of MSME loans.

The committee suggests both greater oversight and increased corpus for some credit guarantee schemes.

It added that regulatory and supervisory guidelines put in place by the RBI can be based on the rules that have been devised by the World Bank Group for such schemes.

The committee also notes that some of the credit guarantee schemes may need an increased corpus. In particular, the size of the Credit Guarantee Fund For Micro Units should be augmented to Rs 10,000 crore by 2024, to support the increase in loan limits under the Mudra scheme.

The credit guarantee fund also needs to increase cover to the extent of 75 percent as against 50 percent at present, the committee said.

SIDBI’s Role In MSME Finance

As a facilitator for the MSME sector, the Small Industries Development Bank of India (SIDBI) should take up a larger role, the committee suggested.

It should gradually take up the role of a market maker for SME debt on select platforms. SIDBI should also develop new ways to provide equity support to MSMEs and help draw in more venture capital and private equity funding for this sector.

The committee has also recommended the creation of a Rs 10,000 crore government owned ‘fund of funds’, which could pool VC/PE money and provide equity support to MSMEs.

In addition, the committee recommended the creation of Rs 5,000 crore distressed asset fund to assist units in clusters where a large change in the external environment leads to bad loans.

Loans to micro industries had an NPA ratio of 8.5 percent as of September 2018, while small and medium enterprises have a higher bad loan ratio of 11.3 percent, according to data available in the MSME pulse report published by SIDBI and TransUnion CIBIL.

More Powers To Tackle Delayed Payments

Delayed payments are a perennial problems for small business units and often lead to liquidity problems for these units.

To deal with this, the committee has suggested that a nodal authority could be created to help resolve delayed payments. On the first day of each month, the nodal authority would assess any pending payments from large companies which have a turnover of over Rs 1,000 crore. The authority would then send a reminder to the larger company regarding such a delayed payment.

If the company does not pay its dues by the following month, the authority would publish their name on its website for lenders and rating agencies to take note. This would work to ‘name and shame’ companies that delay such payments, the committee said.