New Delhi: The Narendra Modi government anticipates at least 15 per cent of the Rs 3 lakh crore worth of loans announced under the special credit line for businesses and micro, small and medium enterprises (MSMEs) will turn bad.
The collateral-free loan scheme was part of the Rs 21-lakh-crore package formulated by the Modi government to battle the effects of the Covid-19 pandemic on the country’s economy.
According to the scheme, the government will bear all losses in case of defaults on these loans as it will provide 100 per cent credit guarantee cover to banks and non-banking finance companies for such loans.
All firms with an outstanding loan of Rs 25 crore and with a turnover of Rs 100 crore are eligible for taking loans under the emergency credit line, subject to the cap of 20 per cent of outstanding credit.
A finance ministry official said the scheme is open to not only those who are registered as MSMEs but any business enterprise that meets the conditions prescribed.
“This means that not only MSMEs but firms in hospitality, travel and tourism and in other service sectors can avail of this credit facility. Our initial rough estimation is 15 per cent of the loans given under the facility may turn bad but this could change depending on how long it will take businesses to revive,” said a finance ministry official, who didn’t wish to be named.
How the scheme will work
The Modi government will provide the guarantee via the National Credit Guarantee Trust Corporation (NCGTC), a government trustee company registered under the Companies Act.
The loans will have a tenor of four years and interest rates will be capped at 9.25 per cent. The borrowers have also been given a one-year moratorium on payment of the principal amount.
Due to the moratorium on loan repayment, however, the NPA situation will emerge only by the end of the next fiscal.
The finance ministry official said the ministry will provide capital to NCGTC this fiscal to help it underwrite guarantees for these loans but the capital infusion requirement for next year may be higher.
Economic activity crucial
Bankers said more of these loans could become non-performing assets (NPAs) if economic recovery takes longer than anticipated and businesses are forced to shut permanently.
“How long will the lockdown last? How long will it take to revive economic activity in big cities? When will the labour come back from their villages? There are too many uncertainties for businesses right now,” said an official with a Mumbai-based public sector bank, who didn’t want to be identified.
“MSMEs may not find it easy to survive, especially with their cash flows impacted due to delay in payments from bigger firms,” said the banking official.
“The bad debts may be substantially higher in this segment compared to others and because of this banks have been cautious. The government has promised a full credit guarantee precisely for this reason to encourage banks to lend more,” added the official.
In a note earlier this month, Care Ratings pointed out that though MSME NPAs may come in lower in the current year due to the moratoriums, they could “witness a spike in the next year, especially if the business environment remains challenging”.