Banks want 100% guarantee from the government before signing the coronavirus top check for small businesses

Mumbai | New Delhi: Bankers want an almost total state guarantee for everyone incremental loans sanctioned for micro, small and medium enterprises (MSMEs), and also up to 20% of new asset purchases from non-bank providers, said four people familiar with the matter. There are tough negotiations with the government on these two issues, with bankers unwilling to give in to their demands, and the government decided how much it can offer as a guarantee.

People close to the talks said that bankers’ perception that business activity will take a long time to return to pre-lock levels is countered by the government’s belief that demand is unreasonable, as the damage would not be long-lasting and cash flows would resume once businesses restart.

“The discussions are about a state guarantee for top-up loans to MSMEs. 100% of the topup should be guaranteed by the government, ”said one of the people mentioned above.

The banks are currently offering 10% of outstanding loans to MSMEs as additional working capital at a concession rate to help them flow through the temporary liquidity crisis. They want this amount to be guaranteed by the government for losses due to the ongoing crisis.

May depend on the turnover of MSME

People close to the discussions said the guarantee could depend on MSME’s revenue.

“The cut could be Rs 25 crore revenue per quarter or Rs 30 crore,” said one of the persons. “But it is not definitive as the government is still in talks. The total fund for this guarantee may be Rs 15,000 crore, which could allow for Rs 1.5 lakh crore loan. But if the government thinks there is a need for more, it may be a higher amount. ”

The proposals were first made by Indian Banks’ Association (IBA), but they are stuck as the Treasury struggles with various industry proposals. It is said that the Prime Minister’s Office is involved in these discussions. The IBA did not respond to an email seeking comment.

“The proposals have been different and have involved different ministries and corporate bodies. The Treasury wants to hear everyone. The IBA has given its proposals and is now waiting for a response. Hopefully things will go in the right direction,” said a second person involved in the negotiations.

The government and the government Reserve Bank of Indiaworks in consultation with banks on a package to revive credit flows to small and medium-sized businesses and unload the debt market, which is almost frozen after six stops Franklin Templeton funds. A backstop facility or the size of the losses the government will take from the new loans or asset purchases is a sore point with no deal yet.

A sovereign loss guarantee on loans to MSMEs not only gives banks comfort but will also reduce bank risk weights. Loans with government shutdowns are considered less risky under the banking rules.

“Discussions are only a guarantee for MSME loans only because this is the segment that is most affected and therefore requires more support. This sector is also crucial in terms of employment generation and thus the speed of these loans,” said the third person .

However, given that non-bank financing companies (NBFCs) are the main intermediaries between the banks and borrowers, NBFCs must be funded if the channel is to be cleared. Even if banks are reluctant to lend them, they can make some asset purchases where the initial loss of up to 20% could be guaranteed by the government.

However, people mentioned above said the contours of the aid package during constant discussions and there may be changes.

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