Reduced Repo Rate Would Open More Credit Opportunities for MSMEs Happy news for medium & small businesses - Interest rates on loans are set to fall further

India's economic growth has slowed down immensely. To boost the sagging economy, the Reserve Bank of India announced its fourth consecutive rate cut this year by an unconventional 35 basis points (bps). This step is expected to encourage the interest rates on loans fall further, making the businesses that are dependent on regular credit happy.

Due to lower risk weight, banks will have to set aside less capital for consumer loans, leaving more money left to lend. "The credit flow will now revive with today's measures and growth will pick up," RBI Governor Shaktikanta Das said. With the latest move, the repo rate stands reduced by 110bps in 2019. However, banks have reduced lending rates only by 29 basis points.

Banks in Dilemma

The financial institutions are arguing that their cost of funds does not increase immediately and the high returns on public provident fund and NSC make the task tougher. Nevertheless, RBI is taking crucial efforts to boost credit flow to MSMEs. They are encouraging banks for lending to registered non-banking financial companies (NBFCs) for on-lending up to INR 20 lakh to micro and small enterprises.

The central bank also increased the ceiling for a bank's exposure to a single NBFC to 20 per cent of its Tier I capital from 15 per cent earlier. "Loan disbursals from NBFCs were continuously falling in the past few months and slowdown in the sector has been impacting the overall economy. The rate cut and the liquidity infusion by RBI will give further impetus to NBFC lending business," shared Ketan Patel, CEO, CASHe.

Road Ahead for MSMEs

The micro, medium and small enterprises (MSMEs) are, more or less, always in the midst of cash crunch due to lack of credit availability. If available, the loans bring a heavy burden of interest rates. Not just the high interest but the delay in loan disbursals and banks' insistence on collateral for loans are also among the major concerns which are halting the small businesses from growing today.

The related concerns were raised by the shareholders of the community earlier this week in a meeting with the finance minister, Nirmala Sitharaman. As per a government official, as quoted by media reports, MSMEs have demanded a differential interest rate for the sector.

Liquidity Framework

With respect to the 35 bps cut, "there was not much any clarity on whether the current liquidity situation (characterized by large surplus liquidity) is likely to persist under the new liquidity framework that is due to be announced soon," feels Abheek Barua, Chief Economist, HDFC Bank. He does believe that the risk of significant liquidity compression seems remote.

The reform is expected to cheer up borrowers from capital intensive businesses, especially real estate. The rate reduction will provide the much-needed stimulus for reviving the demand in the realty sector. "Going forward, it is imperative for banks to reduce lending rates and ensure that the home loan borrowers reap the benefits of this move," said Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani.

The Government's Strategy

The minister of MSMEs, Nitin Gadkari keeps insisting that the 59 minutes (loan scheme) has resolved the issues of immediate loan sanctions. The industry, however, argues about the delayed disbursement of loans. While the scope of this scheme has been expanded to INR 5 crore from INR 1 crore, there are various internal issues that are yet to be resolved.

The MSME sector creates 113 million jobs and the government is giving the highest priority to resolve its problems. The government has recommended the creation of an e-commerce portal for MSMEs to go global. Moreover, there is no way for merchants to get in touch with these organizations and such a platform could also be beneficial in that regard.