Full collateral can push banks to lend

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Non-bank financial institutions expect banks’ appetite for lower-rated papers to increase

Risk-averse banks may now be eager to resume lending operations, with the government deciding to provide full collateral for the loans they have made to borrowers to revive the economy crippled by the COVID-19 lockdown.

Finance Minister Nirmala Sitharaman announced a 3 lakh crore emergency working capital facility for businesses, including micro, small and medium enterprises, as part of the ₹ 20 lakh crore financial package announced on Tuesday by the Prime Minister Narendra Modi.

This 100% credit guarantee means that banks will not have to provision loans, i.e. they will not have to build up capital in the event of non-fulfillment of the account.

Bankers have said they will wait for operational guidance from the Reserve Bank of India (RBI) to understand whether the government will provide the guarantee directly or through agencies like SIDBI. If the government provides the guarantee directly, no risk weight is attached to the loans. “Measures for MSMEs through guarantees, equity injection and debt support will incentivize bank lending to MSMEs and provide crucial support to distressed entities in the current situation,” said SBI Chairman Rajnish Kumar.

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Regarding banks’ reluctance to lend, which is clear from the more than 8 lakh crore parked by these lenders with the RBI reverse repurchase window, Ms Sitharaman said many borrowers were not fully respecting the loan limits sanctioned due to foreclosure. . As a result, banks have no choice but to keep the funds with the RBI.

Liquidity for NBFCs

With the government’s announcement of a special 30,000 crore liquidity plan for NBFCs, to be provided by banks, non-bank financial corporations now expect bank financing to begin. When announcing the program, the government said investments would be made in primary and secondary market transactions in investment grade debt securities of NBFCs, HFCs and MFIs. Such investments will be 100% guaranteed by the government. The NBFCs expect banks to be more willing now to exploit the RBI’s special window for liquidity intended exclusively for them. Banks were reluctant to borrow in the first such auction – they only used about 50% of the notified amount of 25,000 crore. “As part of the Full and Partial Guarantee program, we expect an increase in liquidity in the NBFC ecosystem which in turn would help MSMEs resume operations,” said Umesh Revankar, Managing Director and CEO of Shriram Transport Finance.

The NBFCs also expect the partial credit guarantee scheme to strengthen banks’ confidence in lending. The program will cover loans from lower-rated NBFCs, HFCs and microfinance institutions (MFIs) and the government will provide a 20% sovereign first-loss guarantee to public sector banks. “Special liquidity support to lower-rated NBFCs will mean that banks will not have to take credit risk and NBFC papers are likely to run out,” said Sanjay Chamria, VC & MD, Magma Fincorp.

The rating agency Crisil, however, warned against the increased risk for banks arising from their MSME portfolio.

“The 3 lakh crore full guarantee program will provide a much needed boost to disbursing credit to cash-strapped MSMEs. However, the risk of a deterioration in the credit culture will remain controllable, as the bankers would have no skin in the game and, therefore, one-off disbursements could increase the risk, ”said Isha Chaudhary, director of CRISIL Research.

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