By Bindu Ananth, Dvara Research
This article first appeared in BloombergQuint
The much-awaited rescue package for micro, small and medium enterprises was unveiled on Wednesday by the Finance Minister and while several specifics are awaited in terms of the operationalisation of the schemes, there is enough information to understand how these might play out. At a high level, the measures are substantive in terms of magnitude, address multiple categories of MSMEs, and implicitly acknowledge the shortcomings observed from past measures such as weak credit transmission through the banking channel.
The Rs 3 lakh crore package (around 20 percent of total credit outstanding to MSMEs) is aimed at standard MSME accounts and appears to provide additional working capital to existing customers of banks and NBFCs. I am no fan of 100 percent risk guarantees to lenders. However, the intent here seems to be to “automate approvals” to the extent of an additional 20 percent of outstanding credit and thus break the credit inertia observed in recent times. There are similarities here to an earlier announcement that public sector banks would provide emergency credit lines of 10 percent. However, all lenders have been covered under this now and of course, the guarantee cover has been extended. For lenders, the all-important detail here will be the pricing guidelines on these loans. Given that there will be no credit losses and capital charge on these loans, the pricing should be such that it covers their marginal costs (funds and operations). The other incentive for lenders, of course, is that this could preserve the quality of their existing loans to these clients by preventing distress actions.
The 12-month moratorium on these loans should provide MSMEs the breathing room to pay for operating costs even as they try and get their business back on track.
I am less sanguine about the potency of the subordinate debt and fund-of-fund ideas because there are significant incentive and structure-related issues to work through that suggest that it may not yield much in the short-term. Potentially, the equity funding could be prioritised for start-ups that are mounting an effective response to the Covid-19 crisis rather than spread too thin.
Coming to the measures for non-banking financial companies, there is some good thinking that has gone behind these guarantee structures. There are two different ideas here. One appears to be a targeted liquidity facility aimed at managing short-term asset-liability mismatches for NBFCs, housing finance companies, microfinance institutions. Therefore, this will be administered by the government directly rather than via the banking system. Again, the pricing detail is important here so that entities that have alternative sources of funding self-select out of this facility.
This will require a careful analysis of the quality of the NBFC and the nature of its ALM mismatches.
Nearly Rs 1.7 lakh crore of NBFC debt is falling due in June, as per a CRISIL alert. Therefore, the Rs 30,000 crore here needs to be allocated wisely if it is to be meaningful.
The other NBFC measure is the Partial Credit Guarantee Scheme. This appears to be aimed at stimulating more lending to MSMEs by enabling NBFCs to borrow fresh loans from the banking system. So, this is not limited to managing short-term liabilities and therefore likely to have longer underlying loan tenures. PCGS is not a new idea. This was an instrument first launched in August 2019 in light of the NBFC liquidity issues stemming from the IL&FS and related matters. It had to be amended in December 2019 to accommodate for lower-rated players. In that case, the First Loss Default Guarantee was 10 percent, and the total size of guarantee was Rs 10,000 crore. The current intervention has upped this to 20 percent and the total amount of implied guarantee is around Rs 9,000 crore.
This should enable incremental lending of Rs 45,000 crore (9000 x 5) to the NBFC/MFI/HFC sectors.
By specifying that even unrated paper will be eligible, there is clarity on applicability for small NBFCs.
The important details to look out for here are:
- What kinds of borrowings are permitted?
- Does this cover loans, bonds, direct assignments, and securitised paper?
- Are there price caps for the NBFCs vis-à-vis the loans they provide MSMEs?
- Does this include public and private sector banks?
- What about external commercial borrowings?
It is to be noted that under PCGS, the bank has to approach the government for the guarantee cover against its loans, so there may still be frictions and delays in that two-step approval process – a bank tentatively approves a loan and then approaches the PCGS for its guarantee approval.
It may be useful to publish clear criteria so that the bank knows exactly what will be approved by the PCGS.
If this scheme takes off successfully, there may need to be further amounts allocated here to increase the scale of lending.
Onwards To Operationalisation
As is evident, the measures attack multiple issues relevant to MSMEs. By focussing on NBFCs, attention has been paid to the micro-enterprise end of the spectrum. The guarantee schemes are well-conceptualised and need to be administered with speed and efficiency. It would be inadvisable to house these inside SIDBI or MUDRA, thus adding more institutional complexity. Rather, the guarantee programs must have clear and transparent rules and be near-parametric in its administration. One also hopes that the Ministry of Finance will publish weekly data on the off-take under each of these facilities to gauge if these are working as intended. We must be agile and make the needed tweaks as we go along to smoothen the process. For now, it is onwards to operationalisation!