MSME loans: the NBFCs want the guarantee coverage under the CGTMSE system to be restored to 75%

According to World Bank estimates, the MSME credit deficit in India is around $ 380 billion.

Credit and financing for MSMEs: Lenders from non-bank financial corporations (NBFCs) to micro, small and medium enterprises (MSMEs) have requested the restoration of guarantee coverage under the Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE) at 75 %, which was reduced earlier this year. at 50 percent. In February 2018, among the policy changes announced for the program, the scope of warranty coverage was increased to 75%, from 50% for proposals above Rs 50 lakh.

“Coverage needs to be restored to 75 percent because CGTMSE was a scheme that had started to gain traction. During the Covid period, many MSMEs suffered and as a result, the lender portfolio suffered as well. It will be some time before these wallets are repaired on their own, but the attractiveness of the program would determine the extent to which this is taken into account, ”said Alok Mittal, co-founder and CEO of Indifi Technologies at Financial Express Online.

CGTMSE was jointly created by the Ministry of MSMEs and SIDBI in 2000 to catalyze the flow of institutional credit to micro and small enterprises (MSEs). According to the CGTMSE portal, guarantees of 8.36 lakh were approved for an amount of Rs 36,954 crore in fiscal year 21.

In April of this year, the Financial Industry Development Council (FIDC) – a representative body of loan finance assets and NBFCs also reportedly asked the Ministry of Finance and former MSME Minister Nitin Gadkari to reinstate 75% warranty coverage. Also on Monday, he urged SIDBI to do the same, among other demands.

Also Read: Do MSMEs Need Rs 20,000 Crore Subordinated Debt Program That Has Been Extended Until March 2022?

The recent reduction in the amount of payment qualifying under the CGTMSE scheme at twice the amount of the guarantee fee plus recoveries severely dampened NBFC’s risk appetite in financing MSMEs. With CGTMSE coverage becoming cheaper and cheaper, NBFCs have no choice but to become risk averse or insist on secondary guarantees to manage their risks. This can severely restrict the flow of funds from NBFCs to MSMEs. We call for the restoration of the previous limits for the admission of claims under the schemeMahesh Thakkar, managing director of the Finance Industry Development Council – a representative body of NBFC assets and loan financings, told Financial Express Online.

The market for MSME loans is huge in India. According to World Bank estimates, the MSME credit deficit in India is around $ 380 billion. In fact, the share of bank credit to micro and small enterprises (MSEs) in India is currently only about 10 percent of total gross bank credit. According to the latest data from the Reserve Bank of India (RBI) on sectoral credit deployment, banks had deployed Rs 11.10 lakh crore in loans to MSEs in August 2021 while the overall gross bank credit was Rs 108, 97 lakh crore during the month.

“The meaning of re-establishing CGTMSE coverage is particularly right for micro-enterprises which are even less included in discussions of organized finance. The CGTMSE pool has a lot of conditions and also the operational procedure is more difficult and then there is a process in terms of what you can claim and what you cannot claim. However, do not forget that the number of loans managed by CGTMSE is huge and that the scheme must validate that it does not pay ineligible cases. At the moment, MEPs have struggled with stress, so the important thing is to offer them credit, ”Sanjay Sharma, Managing Director of Aye Finance, told Financial Express Online.

The CGTMSE would have made “a lot of sense when lenders weren’t sure about the second wave, but assuming the third wave won’t hit or maybe not as bad as the second wave, the important thing is the availability of the wave. credit”. Sharma said that “the challenge for lenders today is not whether we are going to see losses, because many clients have survived and are therefore better positioned. So, securing credit for those recovered customers is not as much of a challenge as it is for those who are in the middle of the problem. The challenge is also that under CGTMSE, you cannot give credit to someone who is already delinquent. It’s like a chicken and egg situation though. “

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Other IFCD requests included the extension of CGTMSE coverage to loans to educational institutions, acceptance of arbitration as a valid legal measure taken for debt collection under the ECLGS program, the NBFC refinancing mechanism, etc. Most NBFCs, except highly rated NBFCs, depend on banks, which has resulted in insufficient and erratic flow of funds to NBFCs and increased concentration risk at the systemic level, the body said in a statement. letter to SIDBI. Therefore, “There is an urgent need for an effective refinancing mechanism to ensure diversity and greater consistency in the sources of funding. funds at NBFC.

“Regarding the refinancing mechanism, there is a liquidity problem and the cost of capital has exploded for NBFCs. Over the past two years, the bank rate has fallen by around 150 basis points as the cost of borrowing for smaller NBFCs has increased and the spread has actually widened by 300 basis points. So there must be more efficient ways of getting capital to NBFCs to lend to MSMEs, ”Mittal added.

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