The government and the Reserve Bank of India are nearing a consensus on boosting credit flow to micro, small and medium enterprises (MSMEs).

While a relaxation in PCA norms will help state-owned banks kick-start lending to MSMEs, specific relaxation in RBI regulations are also being reworked to provide some breathing space to smaller companies, sources familiar with the matter said.

It is learnt that the finance ministry has impressed upon the RBI to relax certain ‘risk-weight’ norms for lending to MSMEs and align the norms to globally accepted rules for smaller companies in a bid to enhance bank lending to MSMEs.

“Discussions on the rules governing lending to MSMEs are currently underway. There is no demand for any special package or disregarding any prudential regulation. The idea is to align our lending norms and risk weights to globally accepted benchmarks,” two sources confirmed. While the RBI rules require banks to maintain 150 per cent risks weight for both rated and unrated MSME loans, the government and the RBI are in discussions to align them to globally accepted benchmark of a maximum of 75 per cent risk weight for smaller companies.

A senior official with a rating agency, however, said that in case of individual bank exposure of up to Rs 5 crore to a MSME, banks are allowed to have a 75 per cent risk weight as they are classified as retail exposure. Risk weight is capital required to be set aside by banks or housing finance companies while giving loans. The norms stipulated by RBI for banks and by NHB for HFCs are based on risk assessment for each type of asset and so an asset that is considered to be more risky calls for a higher risk weight.

Sources said decisions on these issues may not be taken at the RBI central board meeting on November 19, but are expected to be announced separately. With 11 out of the total 21 public sector banks under the Prompt Corrective Action (PCA) framework of the RBI, MSMEs have been finding it difficult to raise credit in a smooth manner to conduct their business.

Another area where some consensus is likely to emerge is to extend the classification criteria for loans to MSMEs as a standard asset. The central bank had in June allowed banks and NBFCs to classify their dues from all MSMEs, which are pending for up to 180 days, as a ‘standard’ asset in their books, subject to certain conditions. This relaxation is expiring on January 1, 2019 and banks are to revert to 90-day norm, in a staggered manner, for classification of loans to MSMEs as standard assets.

“These changes are expected to throw in a lifeline to the MSMEs, especially at a times when they are facing funding squeeze from both Non Banking Financial Companies` (NBFCs) as well as the PSU banks,” the sources said. The MSMEs accounts for about 45 per cent of manufacturing output in the country and nearly 40 per cent of the total exports. The MSME sector, which had started showing signs of recovery over the past two years after adverse effects of demonetisation, are facing another hurdle as the liquidity squeeze faced by NBFCs chokes a key source of funding to units in the sector.

The Reserve Bank of India data on deployment of gross bank credit till August-end this year shows that credit to industry has grown by just 1.9 per cent year-on-year, and, within this broad category, credit to micro and small enterprises has increased 2.6 per cent, and to medium enterprises by 6.5 per cent. In contrast, credit to the services sector has posted a phenomenal 26.7 per cent growth, while overall non-food credit has grown at 12.4 per cent. The MSME segment accounts for just about 6 per cent of the gross bank credit.

Source : Indianexpress

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