Bad Loan: Raghuram Rajan has a word of caution on MSME lending

Rajan said credit targets were sometimes achieved by abandoning appropriate due diligence, creating the environment for future NPAs.
The next build-up of non-performing assets (NPAs) could be in the loans to medium and small enterprises (MSMEs) under the SIDBI-run credit guarantee scheme, Raghuram Rajan, the former governor of the Reserve Bank of India (RBI), has warned. The government should focus on sources of the next crisis, and in particular, it should refrain from setting ambitious credit targets, he said.

Rajan said credit targets were sometimes achieved by abandoning appropriate due diligence, creating the environment for future NPAs. “Both MUDRA loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk. The Credit Guarantee Scheme for MSME (CGTMSE) run by SIDBI is a growing contingent liability and needs to be examined with urgency,” he said in a 17-page note to the Parliamentary Estimates Committee, according to a Bloomberg report.

The committee had invited Rajan to brief it on the matter after former chief economic advisor Arvind Subramanian praised him for identifying the NPA crisis and trying to resolve it.

Uday Kotak, Asia’s richest banker, also shares Rajan’s views. In a conference call after Kotak Mahindra Bank’s first quarter results, the banker raised concerns over lending to MSMEs because of faulty valuations of collaterals for these loans. “If you and I spoke in 2011-12 about project finance and large corporate loans, I was the one who raised concern about fundamental credit worthiness of some of these large project finance loans. I am today raising similar concerns over fundamental role of collateral valuers and the real truth of those valuations… I believe there is a reasonable reason to believe that there is significant overvaluation of collaterals across the banking and finance industry,” Kotak said.

Launched in 2000, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), now known as UDAAN, has recorded cumulative guarantee approvals of over 25 lakh with an aggregate loan amount of over Rs 1,25,000 crore in FY 2016-17.

A few months ago, a joint study by SIDBI and credit bureau Cibil had said that risky loans worth Rs 1.2 lakh crore to MSMEs in the system could potentially create NPAs worth Rs 16,000 crore by March 2019. However, NPAs were actually moderating, but it was too early to say that they were bottoming out, it said.

Strong credit demand in this segment, among other things, driven by formalization of credit demand is likely to keep the overall NPA rate in this segment in check, it said.

To tackle trade finance woes of MSMEs, the government announced in May this year that it would double the credit guarantee up to Rs 50,000 crore for 2018-19 under the CGTMSE scheme. “We are allowing non-banking financial companies partial collateral, and this year, unlike previous years where, from fund we used to guarantee a credit flow of Rs 19,000-20,000 crore every year for last three years, we plan to cross Rs 40,000 crore. it may touch Rs 50,000 crore,” MSME secretary A.K. Panda said at a conference.

via Bad Loan: Raghuram Rajan has a word of caution on MSME lending

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