Risk-wary banks may stall small biz rescue

MUMBAI:Banks wary of bad loans could derail the government’s mega rescue package for small enterprises, industry officials said, since much of the promised money is to be given out as loans.

Finance minister Nirmala Sitharaman announced ₹3 lakh crore collateral-free loans and partially guaranteed ₹20,000 crore of subordinated debt for micro, small and medium enterprises (MSMEs). However, the whole plan hinges exclusively on greater lending by banks, which have so far preferred paltry interest from RBI to greater returns from riskier loans.

Experts said private banks will be more choosy under the scheme than their public sector counterparts. Also, while ₹3 lakh crore of loans will be fully guaranteed by the government, the partial guarantee for subordinate debt may deter lenders. Banks have been parking over ₹7 lakh crore daily with the Reserve Bank of India for quite some time now, stashing a whopping ₹7.83 lakh crore on May 14 under the reverse repo operations of the central bank, at a meagre interest rate of 3.75%.

RBI has cut the reverse repo rate by 115 basis points in just a month to discourage banks from parking funds with it instead of lending. However, the measure has had little effect—while banks kept ₹4.43 lakh crore with RBI on March 27 when the rate was first cut, the amount was ₹7.09 lakh crore on April 17.

“Collateral-free loans as well as subordinate debt schemes to MSMEs are positive, but rely significantly on the banking as well as the NBFC sector to provide the funding,” Care Ratings said.