Banks doing a ‘terrible job’, say MSMEs

A little over two months ago, Finance Minister Nirmala Sitharaman announced Rs 3-lakh-crore collateral-free loan scheme last month to help millions of small businesses cope with the economic fallout of the pandemic. Part of the ‘Self-Reliant India Mission' or ‘Aatma Nirbhar Bharat’ package, the 100% Emergency Credit Line Guarantee Scheme (ECLGS) was rolled out for firms with an outstanding credit of up to Rs 25 crore as on February 29, with the account being categorised as regular, and an annual turnover of up to Rs 100 crore is eligible under the scheme.Further, these loans, which, according to the government were supposed to benefit 45 lakh Covid battered MSMEs in terms of resuming business activities and safeguarding jobs, came with a complete credit guarantee on the principal and interest amounts by the government.On the face of it, the scheme, which is the biggest fiscal component of the Rs 20-lakh crore Aatma Nirbhar Bharat Abhiyaan package, looks quite well timed and beneficial to the cause of Covid-hit Indian MSMEs.However, given the fact that the mega scheme is supposed to be availed till October 31, 2020 or till the amount of Rs 3-lakh crore is exhausted, the critical question worth probing is to what extent has it yielded the desired objectives?According to the last available figures, banks have sanctioned loans of about Rs 1,20,099 crore under the scheme, but disbursements against this stood only a shade half of it at Rs 61,987.90 crore till July 9. Public Sector Banks (PSBs) have done a better job by sanctioning Rs 68,145.40 crore, of which Rs 38,372.88 crore has been disbursed as of July 9. Private sector banks on the other hand have same sanctioned Rs 51,953.97 crore and disbursed Rs 23,615.02 crore.As of 9 July 2020, the total amount sanctioned under the 100% Emergency Credit Line Guarantee Scheme by #PSBs and p… https://t.co/MKgyeVKsbM— NSitharamanOffice (@nsitharamanoffc) 1594377502000The amount disbursed till now has gone to 16, 65,439 accounts, but what is worrying is that the figures mean just a little over 20% of the Rs 3-lakh crore has been disbursed to small businesses. Given the scale of the problem that MSMEs face, the response to the scheme seems tepid and the benefits it has provided till now, being limited in nature.Can it also be a case that numerous bottlenecks that have traditionally plagued MSMEs’ access to timely and adequate supply of liquidity, especially from the formal sources, has again come back to haunt the process of economic recovery. Is it a case of continued lethargy on the part of banks to lend?The right customerRajeev Yadav, MD & CEO of Fincare Small Finance Bank (FSFB), however, thinks otherwise. “In the current scenario, the bankers are not averse to lend. However, we want to lend to the right customer segments. As a fiduciary responsibility towards its depositors, banks will rely on the ground assessment and checks before lending,” reasons Yadav.However, small businesses have often complained that these “on-ground assessment and checks” have long been the key deterrents to Indian MSMEs’ access to credit, a segment whose sizeable chunk comprises of micro-enterprises.According to the MSME Ministry’s FY19 annual report, India has about 6.33 crore MSMEs, out of which 6.30 crore or about 99.4 % are micro-enterprises. Of this, 99.4 % of micro-enterprises, this segment has been mostly left out of the of the ECLGS scheme. What is even more important to note that the scheme is only on the basis of existing term loans and not for a borrower looking for a new loan.Noteworthy is another piece of information tweeted by the Finance Minister. According to the FM, in terms of disbursement of loans under ECGLS scheme, the market leader State Bank of India (SBI) tops the chart, having sanctioned Rs 20,788 crore of loans and disbursed Rs 13,893 crore It is followed by Punjab National Bank, which has sanctioned Rs 8,977 crore and disbursements stood at Rs 2,975 crore as of July 9. 76972241Private sector banks have been slow in lending and this has clearly hurt the scheme. In fact, speaking at a CII Virtual Dialogue late last month, Kotak Mahindra Bank and CII President, Uday Kotak acknowledged that private sector banks have taken a "little longer" than the public sector banks in terms of loan sanctioning and disbursals under the ECLGS scheme. Kotak has said private lenders will soon catch up.Need for lenders to be empatheticIndustry representative while calling for the pace of disbursal to be hastened, highlight the perils of not addressing the “discouraging attitude” of lenders towards MSME customers. According to Rajiv Chawla, Chairman of industry body IamSMEofIndia, there are many banks, especially private lenders, which are doing a “terrible job” when it comes to considering loan requests from SMEs.“Private sector banks are not helping customers beyond the point RBI has asked them to do. Even for sanctioning collateral-free emergency loans, they are throwing many tantrums,” highlights Chawla. His observation comes despite the fact that the RBI has clearly asked lending institutions to assign 'zero' risk weight on ECLGS loans. Moreover, while the scheme offers a top-up loan of 20% to the MSMEs outstanding facility as on 29th February, Chawla adds that in cases wherein borrowers, having an additional requirement, want to tap additional limits - say 25% or 30%, banks are not willing to consider such a request. “Banks are certainly averse to lending these days,” he asserts, flagging few private banks, in clear violation of RBI guidelines, are even demanding pre-closure charges (ranging 4-5%) from MSMEs. According to a recent observation made by the All India Manufacturers Organisation (AIMO), banks are mostly extending loans against existing collateral, such as a property, thereby defeating the very objective behind the scheme. “The loans are extended mostly to those accounts which have already given collateral security (having a value of two times the present loan taken),” said AIMIO.Lingering issueGetting banks to help SMEs is logical, but questions remain if it’s adequate. Many point out that the Rs 3-lakh crore is at the moment only a provision and the Government could have done more to support millions of small businesses. One way could have been through grants, but Minister for MSME, Nitin Gadkari, in a recent interview with ETRise pointed out that this was not possible for the government.Access to formal sources of finance has always been an issue for small businesses and even the existence of a collateral free loan scheme in the form of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for years has not done much to change the situation on the ground. To expect banks to do the heavy-lifting of getting MSMEs back on track may be a tad ambitious, especially if one goes by past data. 76972681Source - IFCOf what MSMEs received in the years 2017 and according to IFC report, the SCBs, together with RRBs and UCBs, make up the Rs 9.4 trillion ($144 billion) of credit supply from formal banking institutions. The balance Rs 1.5 trillion debt of formal debt from both non-banking finance (NBFCs) and institutions like the SIDBI and State Financial Corporations (SFCs). The contribution of the NBFC sector should have gone up considerably since 2017, but banks still form the backbone of institutional lending. It is, hence not surprising, that the banking channel has been entrusted with the job to provide support to the sectorHowever, according to the same report, the total addressable credit gap in the MSME sector is estimated at Rs 25.8 trillion ($397 billion) and what is more worrying is that despite various government schemes, this gap has only widened over the years. Micro and small enterprises together account for 95 percent of the viable debt gap that can be addressed by financial institutions in the near term, says the report. The gap is wide in the North East Indian states and the low income states since banking presence is still very limited. 76972691Source - IFCBalancing actToday, being an intermediary and the custodian of public money, banks have to be prudent in their lending decisions. Equally important is the fact that they play a very crucial role in getting the wheels of the economy moving.“Yes, in this phase, banks have become even more careful about this fiduciary responsibility. Asset-liability matching is a hygiene requirement for all banks,” emphasises Yadav of FSFB. However, he adds that these are unprecedented time a one-size-fits-all approach shall not apply, both for borrowers and lenders. “If a business is seeing a demand for its products, there is an opportunity to invest, both through capex and opex, thus creating a demand for term loans. In other cases, short term funds may be required to tide over the temporary cash flow challenges, thus creating a demand for cash credit and overdraft facility,” he adds.Ram Iyer, Founder and CEO of trade financing platform Vayana Network believes risk aversion amongst lenders, especially among banks was visible since H2 of 2019 and it has only aggravated now. Banks, according to Iyer, are primarily focused on portfolio monitoring and recovery from existing clients, and most lenders have ruled out taking ‘new customer risks’, a scenario that is likely to continue through 2020. “For many sectors, it’s a question of survival. If we take MSMEs, they desperately need money in debt or any other form, however, lenders are ready to give credit only to those with good conduct,” says Iyer adding, with already a 10-14% NPA ratio in 2019, this year could see a sharp rise in MSME insolvencies. 76972321Lasting impact Covid has also impacted banks’ interplay with borrowers. According to Abhay Kelkar, Vice President of research and consulting for TransUnion CIBIL, banks and lending institutions need to strike a balance-safeguard to the interest of depositors, maximize shareholder returns, and simultaneously support borrowers and continue lending so that the flow of credit continues in the economy. “These are unprecedented times where both lenders, as well as borrowers, are trying to cope up with the situation. Lenders will attempt to re-assess borrower creditworthiness and exposure in the light of changing times. At the same time, borrowers may seek extended relief from lenders so that they can manage their finances," opines Kelkar.In the post-Covid era, financial institutions besides revisiting asset-liabilities will need to redraw their lending model. “From our interactions with banks, they seem to be open to the idea of lending, but corporates or SMEs are not seeking growth capital at this stage. The demand for loans will take some time to revive and when it does, the banks, as custodians of public money, will have to evaluate the risk and lend accordingly,” says Tarun Bhatia, MD and Head of South Asia for Business Intelligence and Investigations at Kroll, a risk consulting firm.Bhatia adds that the system cannot expect banks to lend with closed eyes as they will eventually be, and should be, held accountable. As small businesses look for a lifeline, banks may continue to be what they have been for a number of years now - circumspect.

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