After MSMEs, It's Time To Focus On Large STRESSED Sectors

The back office of the State Bank of India, the largest lender by assets, has shot off letters to its 810,000 small and medium enterprise customers offering them pre-approved collateral-free loans to restart their businesses. While 7,000 SBI branches are engaged in the sanction and disbursements of such loans, chairman Rajnish Kumar is monitoring the progress in real time.

The scene is no different in other public sector banks. The bosses of SBI’s neighbours at Mumbai’s business district Nariman Point -- Union Bank of India and Central Bank of India -- have been driving down to their offices everyday to take stock of the biggest loan drive ever undertaken for micro, small and medium enterprises (MSMEs). These units are the second largest employer with a 31 per cent share in India’s GDP. Most of them are affected by the lockdown to contain the Covid-19 pandemic.

The banking system is expected to give Rs3 trillion collateral-free “revival” loans to those units that have bank loans on their books already. The four-year loan, including one-year moratorium, are fully backed by government guarantee. If a customer defaults, the government will compensate banks for the loan loss. While 75 per cent of such losses will be made good immediately, the banks will have to wait for the rest till all attempts of recovery fail.

Any business unit – it may or may not have the MSME tag – which have a Rs100 crore turnover and Rs25 crore outstanding bank credit as on February 29, 2020, can get up to 20 per cent of their outstanding debt as fresh loan from the banks, no questions asked. This pegs the maximum fresh credit for one unit at Rs5 crore. Any unit that had not delayed paying an instalment for its existing loan beyond 60 days is eligible for this facility.

Till June 5, 12 public sector banks sanctioned 2.89 lakh such loans and disbursed to 1.52 lakh units. In value term, Rs17,706 crore was sanctioned and Rs8,320 disbursed. These figures have been rising every day. Union Bank managing director and CEO Rajkiran Rai G says his bank’s sanctions crossed 1.3 lakh customers over the weekend and disbursements, Rs2,000 crore.

Like the SBI, most banks’ back offices are busy checking the customers’ credit history and writing the pre-approved loan offer letters. In the second stage, the branches step in for sanctioning and disbursing such loans. Union Bank has developed a software for fast disbursal of such loans during the Covid-19 time when not every employee can turn up in a branch everyday.

SBI’s Kumar says there are 810,000 eligible borrowers for his bank and, if all of them choose to welcome this loan, his bank will end up disbursing Rs29,000 crore. The bank’s current MSME loan book is around Rs1.89 trillion. Of this, units with Rs1.4 trillion outstanding loans are eligible for the fresh loan.

In June, the SBI has been offering such loans at 7.8 per cent. The rate will come down to 7.4 per cent next month, following the latest round of cut in the RBI’s policy rate, to which the bank’s external benchmark for loan rates is linked. Union Bank and most others are giving such loans at 7.5 per cent. Private sector banks, which have not yet entered the arena in a big way, are expected to charge borrowers 9.25 per cent and the non-banking financial companies, 14 per cent.

Even at 7.5 per cent, this is a profitable business. Since all such accounts are backed by sovereign guarantee, their risk-weightage is zero. So, there is no capital cost for the banks for such loans. Besides, the default risk is taken care of by the government. In the worst-case scenario, bankers do not see more than 15 per cent of these loans turning bad. By this assessment, the burden on the government could be Rs45,000 crore in the worst-case scenario. There will be no fiscal burden this year because of the one-year moratorium.

Taking into consideration available information, exposure to the banks and past payment history, a recent study of credit information company TransUnion CIBIL Ltd says 74 per cent of the close to 8.9 million such units are creditworthy. Their exposure to the financial system in December 2019 was Rs11.04 trillion. Around that time, the pie of commercial credit (excluding agriculture and retail) was a little over Rs64 trillion. Of this, the share of units with a maximum Rs50 crore exposure was Rs17.94 trillion, a little less than 28 per cent.

While the Rs3-trillion booster dose will help bring the MSMEs back on the rails, what will the banks do with the larger corporations? A minuscule part of the MSMEs have direct interface with the customers. They supply products to companies many of which are not in the best of health at this point of time. Unless these companies are back on their feet, the MSMEs’ woe will continue.

Some of the large corporations affected by the lockdown will move ahead as normalcy returns but many companies had been under stress even before the Covid-19 attack. They need hand-holding by the banks to get back to business. The six-month moratorium on loan repayment and one-year holiday from the insolvency law will not help them.

The MSMEs alone cannot simulate the economy; loans given to certain sectors need one-time restructuring. Instead of a blanket restructuring, the RBI can explore a refinance product for the companies that have enough assets but cash flows are strained.

In March, realty firm Lodha Group’s London subsidiary raised $200 million issuing bonds in the Singapore market. The dollar bond issue of Lodha Developers International Ltd, a wholly-owned subsidiary of Macrotech Developers Ltd (formerly known as Lodha Developers Ltd), will mature in 2023. Going by a company release, the proceeds were used to fully repay its outstanding $324 million bond, which matured in March 2020. At least one large private bank had underwritten this issue.

It is a kind of restructuring of debt – a fresh bond raised money to redeem an old bond. The banks need to do such refinancing/restructuring of some of their large exposures to the stressed sectors at this hour of crisis.

This column first appeared in Business Standard.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd.

Twitter: TamalBandyo  

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