RBI may allow relaxation for MSME loans, scrap risk weight

The unconditional government guarantee gives enough comfort to RBI to remove the risk weight on these loans, leaving banks with more capital to lend

MSMEs Bank loans
The Reserve Bank of India (RBI) is in favour of scrapping the risk weight on loans given by banks to small and medium enterprises under the government’s ₹3 trillion loan guarantee scheme, a top official at RBI said. The Union finance ministry had proposed the scrapping as part of the operational guidelines of the scheme following the announcement by finance minister
Currently, loans to medium, small and micro enterprises (MSMEs) carry a risk weight of 20%.
The move, which comes as yet another nudge for lenders to rescue the struggling sector that employs millions of Indians, follows the government agreeing to fully guarantee these loans in case of default. According to the official cited above, who spoke on condition of anonymity, the unconditional government guarantee gives enough comfort to RBI to remove the risk weight on these loans, leaving banks with more capital to lend.
Queries sent to an RBI spokesperson remained unanswered.
The central bank assigns risk weights to every type of loan, depending on the likelihood of its default. The risk weight on a government bond is zero, while it could be as much as 100% for lending to a real estate developer. The bank accordingly adjusts the asset value as per the risk weight. The riskier the asset, the higher the risk weight and the lower its value. A lower risk weight means the bank will have to set aside less capital against these loans.
The RBI’s latest move aims to encourage banks to provide fresh credit to these borrowers without the pressure of setting aside additional capital against these loans.
Loans under this government scheme will be guaranteed by the National Credit Guarantee Trust Co. Ltd (NCGTC) in the form of a Guaranteed Emergency Credit Line (GECL) facility. The guarantee cover will be available for additional working capital and term loan facilities up to 20% of the outstanding credit limit up to ₹25 crore as on 29 February. For instance, if a business has a loan outstanding of ₹1 crore, it can borrow an additional ₹20 lakh. Only existing borrowers with revenue of up to ₹100 crore and those with up to 60 days past dues can avail of this scheme.
The tenure of loan under this scheme will be four years, with a moratorium period of one year on the principal amount. The NCGTC will not charge any guarantee fee.
The interest rate under the scheme is 9.25% if the loan is extended by banks and financial institutions, and 14% if given by NBFCs.