RBI worried over credit guarantee scheme of MSMEs?

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The Reserve Bank of India (RBI) is concerned about the extent of micro, small and medium enterprises (MSME) loans backed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), and regulatory oversight of the scheme, says a report from Live Mint. 

Citing one person, who spoke on condition of anonymity, the newspaper says, "The credit guarantee scheme is clearly over-leveraged. There needs to be some gradation to determine which loans can be guaranteed and which cannot. At this point, there seems to be barely any assessment of proposals and all the loans which apply for a guarantee are granted approval. The RBI is closely watching the situation and is concerned about the over-leveraging."

The CGTMSE was set up in association with the Small Industries Development Bank of India (SIDBI) and guarantees loans up to Rs1 crore. The CGTMSE scheme extends guarantee cover to units availing limits up to Rs1 crore within certain threshold if the primary lender extends loans sans collateral. It is mandatory to lend up to Rs10 lakh without seeking collateral security. Several banks take collateral for term loans and grant collateral free advances up to Rs10 lakh working capital. Once instalment or interest becomes overdue beyond 90 days, both working capital and the term loan, the unit becomes NPA and the collateral security gets invoked for realization of all the loans. 

Pradeep Malgaonkar, in-charge of CGTMSE at SIDBI told the newspaper that the Trust has so far issued cumulative guarantees to 23.23 lakh loans involving an aggregate loan amount of Rs1.08 lakh crore over a period of 16 years.

According to the newspaper report, RBI's concerns might be stemming from the fact that the MSME lending segment is susceptible to volatility at times of economic stress. As such, banks often see a build-up of bad loans in this segment.   "For instance, State Bank of India (SBI), the largest lender in the country, had an SME loan book worth Rs1.89 lakh crore as on 31 March, where NPAs worth Rs17,032 crore were reported. This works out to about 9% of the SME book being classified as bad. The overall level of NPAs for SBI is at 6.5% of the total loan portfolio," the report says. 

However, risk appetite for the MSMEs is very low among banks and their adherence to the guidelines of both the RBI and Government of India (GoI) to identify sickness at the incipient stage and to introduce corrective action plans, is highly suspect. By just allowing postponement of instalments for three months, banks label such loans as restructuring without going into the processes of restructuring. The standard advances were restructured to sub-standard advances and were range bound at 0.09% to 0.38% indicating that not much restructuring took place in the sector. 

Banks though moving on CGTMSE coverage, their partial coverage of guarantee - term loan is under the collateral cover while the working capital is under guarantee cover. When there is default of the unit under term loan due to non-payment of interest for 90 days, it becomes an NPA qualifying for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act proceedings.   

It is time that the RBI monitors the MSMEs on more robust data at the regional levels and ensures compliance of the guidelines. RBI data reveals only less than 5% of potentially viable units were revived during the last decade as compared to a huge corporate debt restructuring that went bust. 

According to RBI's Financial Stability Report (12 December 2015), the NPAs in MSMEs, when put to stress test, were 5.04% as of December 2015 with no significant contribution to the losses as percentage of either profit or capital. The industry NPA level was 6.68% and only 7.9% constitute MSME advances to the total advances. 

About 14% of the total manufacturing sector credit is reported for the MSEs while 5.9% of the MSE credit has been declared as NPA. Banks mostly cover all the government sponsored accounts, most of which are in the services sector and transport sector under the CGTMSE. There is no information as to how many and how much of the manufacturing MSEs are covered under the CGTMSE and the amount covered under collateral securities.

It is appropriate for the RBI to tweak the prudential norms to the advantage of the banks that take a positive action in ensuring that the units do not turn sick in the first place and in cases where they find it worthwhile to rehabilitate in the second place so that asset loss and job loss can be avoided. 

MSME units broadly fall into – stand-alone enterprises; ancillary enterprises and cluster based enterprises. While those in the former category could be having wider markets, ancillary enterprises and even some cluster based enterprises operate in narrow markets. If the anchor industries failed, the dependent MSEs would be a pack of cards in spite of themselves.

Instead of worrying over the credit guarantee scheme for MSMEs, the RBI should consider redefining NPAs under the sector differently and also allow takeover of any viable unit if the parent bank is willing to shed it in a manner that such advance would not add to the baggage of NPAs of the receiving bank.