RBI manna for MSME sector can spur demand, says CRISIL SME Tracker

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) at its February 6 meeting made several announcements to spur credit flow to the micro, small and medium enterprise (MSME) sector.

First, the Union Budget for 2020-21 had extended the option of one-time restructuring of MSME loan accounts without classifying these as non-performing assets (NPA) by one more year, until March 31, 2021. The benefit would be available to MSME loans that were in default but “standard” as on January 1, 2019. 

Recognising the importance of the sector that contributes over 28 per cent of the gross domestic product, over 40 per cent of exports, and creates employment for about 110 million people, the MPC further extended the scheme to MSME accounts that were in default as on January 1, 2020, and the said restructuring needs to be implemented by December 31, 2020.

Second, sharpening the focus on credit flow to sectors that have a multiplier effect and support growth, the MPC permitted incremental lending (until July 31, 2020) to MSMEs, automobiles and residential housing without the requirement of cash reserve ratio (CRR), for a period of five years from the date of origination or tenure of the loan, whichever is earlier.

CRISIL Research estimates that this move will bring in savings of 8-10 basis points (bps) for banks. This, in turn, can be passed on to customers by way of lower interest rates, helping spur demand to some extent. 

Third, in an effort to strengthen monetary transmission, the RBI mandated that loans to medium enterprises be linked to an external benchmark, effective April 1, 2020. Earlier, loans to micro and small enterprises had been linked to an external benchmark, effective October 1, 2019.