“Emergency Credit Guarantee” for MSME – Decoding the fine print

(COVID Diaries 4)

Regulators and the government have been advising banks since the Asset Quality Review (AQR) in 2014 to have a ‘measured approach’ towards lending. Hinting at adopting conservatism, both in risk appetite and growth aspirations!

Whilst the clamour by media, economists and investor community was for a bail out of MSMEs, 5% increase in SBL (Single Borrower Limit) has been welcomed by cost efficient banks with loud cheers viz., negligible efforts lead to asset growth and improvement in portfolio mix. The asset and PSL budgets of banks would be partly achieved through these announcements without breaking much sweat. Welcome to ‘Home Banking’!

The details of much-awaited Emergency Credit Guarantee for MSME have been unveiled.  The text in the Guarantee from GOI has pleasantly surprised the banks. There are minimal ambiguities in the eligibility, end use, risk weights and limit assessment. However, the devil lies in the invocation process.

As long as all aspects are appropriately articulated, banks can take calculated risks. Some of the features of the guarantee, which are well articulated from banker’s point of view are –

  1. Pre-approved Limits – Entire purpose of extending credit would be defeated if limits are not approved immediately, since time is of essence. A templated approach would eliminate onerous assessments of limits and end use certification – these are subjected to statutory and regulatory audits. There is no point hair splitting in the absence of any revenues during lockdown.
  • Eligibility criteria simple and well clarified – The eligibility criterion has been well articulated in text and tabular form, leaving no room for ambiguity. This will ensure quick dispensation of limits
  • Inclusion of SMA-0 and SMA-1 customers – Economic cycle in the last one year has not been conducive and even stressed borrowers are equally deserving of banking products and regulatory concessions, for their liquidity and growth.
  • NOC requirements from other Banks specified – In the event of borrower is dealing with multiple banks, NOC requirement has been waived from other borrowers.
  • Interest Rates Capped – In order to avoid any price war, pricing has been capped at 9.25% per annum. This will be NIM dilutive since most of these customers tend to borrow at high IRR and they would replace their high cost debt with the emergency credit line.
  • Charge Creation – While the banks cannot seek additional collateral, existing charge can be extended, for which 90-days period has been granted. There is a matter of credit hygiene.
  • Moratorium and Tenor – Tenor of 12 + 36 months leaves no room for ambiguity and arbitrage.

The invocation process has however come with riders and conditions. The guarantee stipulates several responsibilities on the banks for compliance, such as close monitoring of account, genuine efforts made in recovery, safeguarding of primary security on behalf of guarantor and claims lodged are in order and complete in all respects. This leave room for subjectivity and let’s face it when it comes to invocation of guarantee, banks won’t like to argue with the government. Also, the invocation process would entail extensive audits from the auditors and regulators.

Extending ‘loan-for-a-loan’ is not the most suited way of distributing cash in such times. Ideally this should have been done in the form of direct transfers or rebates in taxes, such as concessions in GST.

Given that banks have limited options to lend in the current environment and are answerable to investors and the media, granting limits which have the blessings of the government and regulator would not be difficult to justify and helps banks in showing asset growth. This also helps the banks in managing the exposures and deferring the problems for better times. The clarity in the process is the biggest take away.

Sumit Kakkar

Sumit is a seasoned Banker with more than 24 years of experience in Credit and Risk functions. He has worked with leading banks including HDFC Bank, Yes Bank, Deutsche and last served as a Chief Credit Officer with Federal Bank.

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