MSME loans to get a “risk-free” label: explained

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Finance Minister Nirmala Sitharaman announced Rs. 20 lakh crore Aatma Nirbhar Abhiyan package to relieve economic distress amid coronavirus chaos. As part of this package, the Reserve Bank of India (RBI) will allow banks to assign a “zero risk” weight to loans that will be granted to MSMEs (micro, medium and small enterprises).

Aatma Nirbhar Bharat Abhiyan package for COVID-19: here is the break of the package Rs 20 lakh crore

Zero risk means that the government will take full collateral for loans made by banks to MSMEs and that banks will not have to set aside additional capital for these loans. This, in turn, will encourage banks to lend, as banks have become risk-averse and reluctant to lend.

Finance Minister Nirmala Sitharaman announced Rs. 3 lakh crore loan for MSMEs under Aatma Nirbhar economic package. A corpus of Rs. 41,600 crore has been made available by the government for the coming years. The National Credit Guarantee Trustee Company Limited (NCGTC) will provide security for these loans in the form of a Guaranteed Emergency Credit Line (GECL) facility.

These loans will have a risk weight of 20% as they are not sanctioned by a direct government comes with a guarantee. This facility is the same as the loans guaranteed by the Micro and Small Business Credit Guarantee Trust Fund (CGTMSE).

The Finance Ministry has asked the Reserve Bank of India to drop the requirement to assign a risk weight to loans after banks raised the issue with the government.

Under the Rs. 3 lakh crore program announced by Finance Minister Nirmala Sitharaman, a 100% guarantee will be provided by the NCGTC to all eligible MSMEs. This program is primarily intended for MSMEs, but small borrowers, including non-bank financial corporations (NBFCs), can also benefit from the program.

Under this mechanism, the loan term is 4 years and a one-year moratorium will be granted on the principal amount. The regime announced by the Ministry of Finance will apply to all loans sanctioned under the GECL until October 31, 2020, or until such amount is sanctioned, whichever occurs first. In addition, no warranty fees will be charged by the NCGTC.

The finance minister asked banks to automatically grant loans to eligible borrowers without fear of the “3Cs” – CBI, CVC and CAG. If loans are made by banks and financial institutions, the interest rate will be 9.25% and if loans are made by NBFCs, the interest rate will be 14%.

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