In order to provide much-needed relief to micro, small and medium-sized enterprises (MSMEs), the Reserve Bank of India (RBI) and the government are expected to reach consensus on easing some standards in rapid remediation standards ( PCA) this will help public sector banks to start providing loans to MSMEs, recently facing a credit availability problem, said the Indian Express, citing people who are closing the case.
MSMEs are the backbone of the Indian economy as they contribute about 32% of gross GDP, 45% of manufacturing output and 40% of Indian exports. In addition, the sector is also the largest employer in the country, after agriculture.
The Ministry of Finance and the RBI are in talks to relax some "risk weighting" guidelines for MSME lending and to align them with the globally accepted benchmark, with a maximum weight of 75% for small businesses , against 150% rated and unrated MSME loans.
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Another issue that should be resolved is to broaden the criteria for classifying loans granted to MSME as a standard asset. In June, the RBI allowed network companies and banks to classify all outstanding claims up to 180 days for all MSMEs in the country as a "standard" asset in their books. This easing expires in January 2019, after which banks will return to the 90-day standard on a staggered basis.
"Discussions on the rules governing loans to MSMEs are ongoing. There is no request for a specific package or prudential regulation. The idea is to align our credit standards and risk weights with broadly accepted benchmarks, "the paper quoted two officials as saying the situation was changing.
Risk weighting is capital that must be set aside by banks or housing finance companies when lending. The same rules for banks are defined by RBI and NHB for housing finance companies. These standards are based on the risk assessment for each asset type and, therefore, an asset considered to be higher risk requires a higher weighting factor.
At present, 11 of the 21 public sector banks fall under the central bank's PCA framework and, as a result, MSMEs face a funding challenge from both banks in the sector. public and NBFCs. However, no final decision on this matter should be taken at the RBI Central Board meeting on November 19th. It should be announced separately, sources said.