Centre’s credit guarantee scheme worries RBI

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Mumbai: The Reserve Bank of India (RBI) is concerned about the extent of micro, small and medium enterprises (MSME) loans backed by the central government’s credit guarantee scheme, two people aware of the matter said. Apart from the quantum of loans guaranteed, the fact that there is no regulatory oversight of the scheme is also a concern, they said.

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), set up in 2000, was part of the government’s credit guarantee scheme to enhance credit to the MSME sector. The trust was set up in association with the Small Industries Development Bank of India (Sidbi) and guarantees loans up to Rs.1 crore. Guarantees offered by the trust allow small and medium enterprises to borrow at cheaper rates.

According to Pradeep Malgaonkar, in-charge of CGTMSE at Sidbi, the trust has so far issued cumulative guarantees to 23.23 lakh loans involving an aggregate loan amount of Rs.1.08 trillion over a period of 16 years. The corpus available with the fund stood at Rs.4,328 crore as of 31 March, Malgaonkar said.

“The credit guarantee scheme is clearly over-leveraged. There needs to be some gradation to determine which loans can be guaranteed and which cannot. At this point, there seems to be barely any assessment of proposals and all the loans which apply for a guarantee are granted approval. The RBI is closely watching the situation and is concerned about the over-leveraging,” said the first person quoted above, speaking on condition of anonymity as the matter is still confidential.

The fund is structured in a way that the government’s contribution to the corpus is four times that of Sidbi’s. The funds from this corpus are invested in various long-term securities and continue to accumulate returns. Any default payout is then adjusted using these funds and the returns from them.

The extent of cover given to an MSME borrower ranges between 75-85%, depending on the kind of borrower. In exchange for availing of the credit guarantee, banks have to pay an annual guarantee fee to the fund trust. On an average, the fee is at around 0.25-0.3% of the total loan amount, bankers said.

Over time, the quantum of loans guaranteed by the fund has grown. The amount of loans guaranteed by the fund is nearly a fifth of the loans extended to industrial companies in the MSME segment. As per sectoral data available with RBI, the total outstanding exposure of the banking sector to MSME industrial companies was at Rs.4.86 trillion in March 2016.

The regulator’s concerns might be stemming from the fact that the MSME lending segment is susceptible to volatility at times of economic stress. As such, banks often see a build-up of bad loans in this segment.

For instance, State Bank of India (SBI), the largest lender in the country, had an SME loan book worth Rs.1.89 trillion as on 31 March, where non-performing assets (NPAs) worth Rs.17,032 crore were reported. This works out to about 9% of the SME book being classified as bad. The overall level of NPAs for SBI is at 6.5% of the total loan portfolio.

Malgaonkar agreed that claims from the fund have risen although they are not out of sync with what is seen across the broader economy.

“The levels of NPAs have gradually increased in the CGTMSE portfolio corresponding to the growth in the programme. The levels of NPAs amongst the MLIs (member lending institutions) and the Indian economy are also a growing concern. The trends in NPA levels in non-collateralized loans are comparatively higher and accordingly, the claims for settlement are on increase with CGTMSE,” Malgaonkar said.

Another point of concern appears to be the lack of regulatory oversight of the scheme. The trust, being a central government scheme, doesn’t technically fall under RBI or even the Insurance Regulatory Development Authority of India. There is also limited discretion exercised on the kind of loans guaranteed.

“At this point, loans are just instantly guaranteed without much assessment of the ability of these companies to pay back. The trust seems to put the onus of due diligence on the bankers. Once there is some regulatory oversight, maybe these issues can be sorted and only deserving borrowers can get necessary guarantees,” a banker said on the condition of anonymity.

To be sure, the fund is currently functioning smoothly and banks have had no trouble in recovering loan amounts in cases of a default.

“When a borrower account becomes NPA, we have to file a claim with the CGTMSE and typically within 30 days, we receive 75% of the loan amount from them,” said a second banker at a large state-owned lender, requesting anonymity. For the balance 25%, banks have to take up various recovery measures, the banker said.

A more graded approach while guaranteeing loans is desirable when it comes to guarantee funds, said an expert. The quality of the underlying loan must reflect in the pricing, said Vibha Batra, group head, financial sector ratings, Icra Ltd.

“It is essential that the risk of the underlying loan is taken in to account while calculating the guarantee fee and that there is enough capital to absorb the risk. There is merit in allowing supervision by a regulatory body, such as the RBI, which has experience with credit and related risk factors,” said Batra.

CGTMSE is not the only credit guarantee fund trust that functions in India. Export Credit Guarantee Corporation of India Ltd (ECGC) provides guarantees against credit availed of by exporters. Irdai regulates ECGC. Last year, the government also set up the National Credit Guarantee Trustee Co. Ltd (NCGTC), which includes a corpus of Rs.3,000 crore for guaranteeing Micro Units Development Refinance Agency (Mudra) loans. A separate corpus of Rs.5,000 crore has been set aside for guaranteeing loans extended under the Stand-Up India scheme. Since these guarantee funds are still in planning stages, no regulators have been appointed to oversee them so far.