Analysis on India’s loan guarantee

Context: To boost the economy and to facilitate lending, the government has implemented several schemes that will improve, both the liability and asset sides of the balance sheets of banks and non-banking financial companies (NBFCs). 

Important provisions of the recently proposed schemes are. 

• 100% guarantees on fresh loans (cap of ?5 crores): to existing (MSME) borrowers up to a total of ?3 trillion. 
• 10% guarantee on existing eligible loans (cap of?5 crore): to NBFCs or housing finance companies (HFCs) originated before the lockdown and purchased by banks. 
• 100% guarantee on fresh and existing investment-grade paper: of NBFCs up to ?30,000 crores through direct purchases by the Reserve Bank of India (RBI) through Special purpose vehicle.
• 20% guarantees on public sector banks’ purchases of fresh issuances of lower or unrated debt of NBFCs/HFCs, including microfinance Institutions, for the next three months.
• 100% Emergency Credit Line Guarantee Scheme (ECLGS): in the form of a guaranteed emergency credit line (GECL) facility.
• Defaulted loans: will be absorbed by the National Credit Guarantee Trust Company (NCGTC).
• Refinancing: 75% would be paid within 30 days and the remaining 25% would be paid after the lender completes recovery proceedings. 

Challenges 

• Lack of adequate budgetary support: to meet invoked guarantees.
• Defaulting of loans: will block lending capital. 
• Delay in disbursals

• Operational steps require checks across credit bureaus by each lender. 
• Only up to 20% of current exposure to an MSME can be lent without getting a No Objection Certificate (NOC) from existing lenders.

• Insufficient measure: to boost the sector’s confidence on government

• NBFC: 

• 14% interest cap on NBFCs makes it difficult for NBFCs to participate
• To assess the refinancing costs within that price cap and asset-liability management on account of existing borrowers availing RBI’s moratorium. 

Suggestions

• Allow MSME customer with a good track record of repayment to borrow money under the scheme
• The scheme should be open to current MSME customers who otherwise are not borrowers.
• Expand the scheme: to the paper of up to 1-year residual maturity at least, as there is a better scheme than this (Partial Credit Guarantee Scheme)

Conclusion: The regular monitoring of these schemes, a willingness to change based on feedback, and periodic disclosure of their performance are essential to help the economy to become self-reliant.