RBI and Government should announce relief measures for MSMEs

All India Association of Industries (AIAI) welcomes the RBI’s move to launch a Rs. 50,000 crore liquidity window for banks to lend to the healthcare sector. We feel that the move will improve flow of credit to hospitals, pharmaceutical and vaccine manufacturers, oxygen cylinder producers and other entities engaged in production, distribution and logistics of medical equipments.

If properly implemented by banks, this dedicated liquidity window can compensate for the gap in public healthcare spending in India. India’s public spending on healthcare currently stands at 1.2% of GDP, compared to the target of 2.5% set by the National Health Policy (2017).

By stepping up investment in healthcare sector, India can also reduce the trade deficit in the medical and scientific instruments, which grew from USD 2.2 billion in 2015-16 to USD 3.1 billion in 2019-20. Further, it can boost our exports of drug formulation and biologicals, where already India has a trade surplus of USD 13.6 billion (in 2019-20).

Commenting on this liquidity measure, Mr. Vijay Kalantri, President , All India Association of Industries and  Chairman, MVIRDC World Trade Center,  Mumbai said, “In this hour of grave crisis, India’s Central Bank has ensured liquidity support at a low interest rate of 4% to the healthcare sector. In normal circumstances, if someone from healthcare sector wants to raise debt, he will not be able to borrow funds at less than 9-10 percent interest rates as the risk free 10-year G-sec bond itself is at close to 6 percent.  Moreover, banks can classify these loans under priority sector lending category. Besides, the RBI is also rewarding lenders offering credit to healthcare sector by providing higher interest income on their surplus reverse repo balance.”

Support to MSMEs

At the same time, Mr Kalantri suggested the government and RBI to provide relief to ‘MSMEs engaged in hospitality, tourism, entertainment, wholesale and retail traders, who are severely affected by the second wave of the COVID crisis.

He said, “The RBI may announce blanket moratorium on MSME loans, instead of restructuring as it will provide temporary respite for small enterprises, who are suffering from loss of sales, rising raw material prices.”

Mr Kalantri also suggested reduction in lending rate for MSMEs. He said, “Even though the RBI’s repo rate is 4%, the base rate of banks stands at 8.8% and the rate charged on MSME loans is more than 10%. We need to bring down the cost of credit for MSMEs to reduce their financial burden.”

Mr. Kalantri suggested the government for effective implementation of the Emergency Credit Guarantee Line Scheme for MSMEs, which was announced last year. It is learnt that some banks are forcing MSME borrowers to use the new loans given under the Emergency credit guarantee scheme to repay their old loans. Thus, small borrowers are not able to deploy the fresh liquidity availed through the emergency credit guarantee scheme for sustaining their business operations

Further, RBI should ensure that the liquidity it has infused under its earlier TLTRO window is flowing to small microfinance institutions. It is alleged that only large NBFC MFIs are able to benefit from this TLTRO, which was announced last year.

It is welcome that RBI has set up a Rs. 10,000 crore liquidity window for small finance banks to borrow at the repo window (at 4%) for on-lending to microfinance institutions. However, we need to remember that small finance banks can borrow from RBI only against government securities. Therefore, only those small finance banks that have excess government securities will be able to borrow from the RBI (under the newly announced TLTRO) and lend them to MFIs. To that extent, we expect the impact of this liquidity infusion to be limited.