Loan Mela’s for NBFCs; Govt. Attempts to Boost Liquidity

Shailza Sharma

16 Nov, 2020

The Finance Minister of India has directed commercial banks to hold a meet for NBFCs to credit loans to NBFCs. The step has been taken to increase credit disbursements. The govt. is aiming to reach the customer of around 400 districts in two phases before 15 October.

Introduction

India is heading towards its festive season. With the festive season ahead government will be closely monitoring the demand pattern. For that government is focused on boosting investments. The finance minister of India has provided direction to commercial banks for setting up a public meet with NBFCs to disburse credit. It is expected that banks will organize open house meetings in 400 districts of the country. The fair will be organized from 1^st October to 15 October. The main idea of the fair will be to push the credit in RAM- Retail, Agriculture, and MSME.

Key Highlights

Banks to hold open meetings in 400 Districts:

After receiving the direction from the Finance minister, commercial banks and NBFCs will visit the 200 districts in 1^st phase. The 1^st phase will start on 25^th September and 29^th September. In this phase, credit to retail customers, farmers, and micro, small and medium enterprises will disburse. Simultaneously, more 200 districts will be covered in the 2^nd phase between 10^th October to 15^th October. The process will start by banks when they move their liquidity to NBFCs, NBFCs, in turn, will pass it on to retail customers. New customers will also be welcomed to take the credit benefit during this meet. Individuals from any category like retail, farmers, MSMEs can seek to affordable credit during this meet.

This will bring NBFCs, Banks, and Borrower together

During the Mela, Banks, NBFCs and borrower will come together and will hold public gatherings in 200 districts. Along with this NBFCs will push credit to self-help groups, MUDRA, borrower, customers looking for housing loans, vehicle loans, MSMEs and farmer producer organizations. According to FM Sitharaman, the idea of such gathering is to ensure maximum credit disbursal during the festive season.

200 Districts to cover by Sep 29

The process of disbursing the loan will be completed in two phases. The aim is to cover 400 districts during this aim. First 200 districts will be covered between 25^th September to 29^th September. However, the remaining 200 districts will be covered in the month of October i.e from 10^th to 5^th October. Minister of state for finance Anurag Thakur will be in charge of this scheme and will depute minister or MPs to attend these public gatherings.

Stressed MSME loan not to be declared NPAs till March 31, 2020

In addition, to push credit in MSMEs, the existing provision of RBI of declaring MSME stressed assets NPA will be kept on the hole. There exists a provision given by RBI to ensure that MSMEs if they are stress assets…the RBI’s existing provisions empower bank not to declare them NPA even after 90 days. According to Finance Minister^[1], no stressed assets MSMEs will be declared as NPA until March 31, 2020.

The intention behind ‘Loan Mela’

The very first scheme of providing cheap credit in India was started back in 1972, after Indira Gandhi Differential Rate of interest scheme. The said scheme made banks to allocate at least 1 percent loan to the farmer and weaker section of the society at a highly- subsidized interest rate. The main idea behind organizing the fair is to link the weaker part of society directly with banks, to boost rural spending and thereby, rural consumption.

In the present scenario, where banks are more interested in providing loans to industrialists and corruption in lending is at its peak.  This mela will bring more transparency in the loan process and make it easy for poor people to take benefit of credit provided by the banks.

Taking Stock

The finance minister issued a statement on the progress made by PSBs on measures announced by the RBI and the government in recent weeks.

• PSBs effected weighted average rate cuts of 27 basis points till Aug 2019, 10 PSBs have done additional rate cuts 5-15 basis points in September.
• 15 PSBs have introduced repo-rate linked product so far.
• Over 10,000 repo rate linked loan proposal amounting to Rs. 40,000 crore have been sectioned.
• 11 banks have introduced one- time settlement system based on the check based approached
• Banks identified Rs. 9,155 crore under newly launched Partial Credit Guarantee scheme for buying out pooled assets of NBFCs.
• Another Rs. 33,200 crore worth assets of NBFCs in the pipeline under the new scheme.

Mela effect over Banks

According to Global rating agency Fitch, the initiatives of banks, lending to non-banking finance companies are designed to help keep credit flowing to the real economy amid growing signs of a slowdown. During the month of an August only central bank have announced three significant steps to encourage lending in NBFCs—

• An increase in the single-exposure limit to 20 percent of tier 1 capital (from 15 percent);
• Priority lending status for credit to NBFIs for on- lending to finance agriculture, small businesses, and home-buyers;
• And a reduction in the risk weight for consumer loans (except credit cards) to 100 percent from 125 percent.

Fitech said that ‘’Averting a significant slowdown would help borrowers and therefore the stability of the financial system, but the measures could push up banks’ risk if these steps lead banks to accept higher credit risk than they previously had the appetite for…

The constant pushing of banks to lend more and more to NBFCs will enable banks to lend slightly more, which would be positive for loan growth but negative for the whole of credit profile if lending is riskier than average’’.

Conclusion

With the above discussion, we only can conclude that the government is more focused on the growth of a weaker section of society. Concerning this, new policies, more pressure over NBFCs to disburse loan has been on the peak. But with this, the government needs to think about making new policies to recover the loans on time. Accountably shall be fixed for the repayment of the loan.