In the current risk-averse credit environment, MSMEs need alternative sources of raising finance to continue as going concerns. Their best bet may be to consider gold loans
The world is currently passing through an unprecedented situation. The coronavirus, that was first identified in China in December 2019, has now swept across the world, infecting over three million people. As the contagion spread, many governments across the world, including India, resorted to countrywide lockdowns as an appropriate strategy to flatten the curve of severely affected patients and reduce stress on the limited resources available to the healthcare systems. In India, the government-enforced lockdown has brought economic activity virtually to a standstill, and this inevitably will have a severe negative impact on economic growth. The impact is already seen in the rise of unemployment from 6 per cent to over 27 per cent; nearly one in three people is without a job and income as on the first week of May.
A survey by the Federation of Indian Chambers of Commerce & Industry (FICCI) on the immediate impact of Covid-19 reveals that besides the direct impact on employment, demand and supply of goods and services, businesses are also facing reduced cash flows due to the slowing down of economic activity, which in turn has an impact on all payments, including those to employees, interest, loan repayments and taxes. The survey further revealed that almost 80 per cent of the organisations reported a decrease in cash flows.
Importance of MSMEs
Over the last decade, MSMEs have grown to become an integral cog in India’s economic growth. They currently contribute around 29 per cent to India’s GDP and have generated about 5.87 lakh jobs in 2018-19 under the Prime Minister’s Employment Generation Programme. Additionally, with more than 50 per cent MSMEs being present in rural India, they are playing a critical role in the alleviation of the depressed socio-economic conditions of rural India, and in providing last-mile connectivity.
Having said that, the fact that the current lockdown has severely stressed the cash-flows of these enterprises becomes extremely significant when considering the revival of the Indian economy. These enterprises operate on a relatively small scale, with lower margins and do not have adequate liquidity buffers in order to honour their liabilities in the present situation. Their problems are further amplified due to challenges in accessing timely and affordable finance.
In the current credit environment, where there is a strong risk-aversion towards lending by banks and NBFCs, MSMEs need alternative sources of raising finance to continue as going concerns. However, if the show must go on, the best way for MSMEs to address the challenges related to financing is to consider gold loans.
Glimmer of hope
Gold loans are essentially loans where gold jewellery is pledged as an underlying security. Due to the high liquidity enjoyed by gold and the established market values for the commodity, these loans have a quick turnaround time. Even prior to the economic crisis, gold loans were a popular and hassle-free method of raising capital for SMEs. Gold loans do not entail the extensive cash-flow assessments that a regular working capital loan would require. In the current pandemic, they can become an effective substitute and efficient source of financing for MSMEs.
To put things in perspective, the retail gold holding by the general public in India is estimated at 25,000 metric tonnes, the market value of which is around ₹100 lakh crore ($1.3 trillion). This is almost in line with the Covid-19 economic package of $ 2 trillion announced by the US government. Considering that gold is the most liquid asset and it is already present in the hands of most Indians, monetisation of even 10 per cent of this can infuse ₹10 lakh crore ($ 130 billion) liquidity into these stressed enterprises. This is a conservative estimate of the immense liquidity that gold loans can unleash into the economy to give the much required fillip to economic activity and growth.
NBFCs, especially gold loan NBFCs, act as conduits for the economy, imparting liquidity wherever and whenever it is required. NBFCs have the unique advantage of grass -root penetration as they have a majority of their branches in the unbanked rural/semi-urban suburbs. This means that gold loan NBFCs, with their last-mile presence and expertise in lending against gold, will be capable of speedy and efficient loan disbursals to every nook and corner of the country. In order to further augment their reach and impact, there are a few policy decisions that the government and the regulator can take. These include:
Categorising credit facilities extended by banks to gold loan NBFCs under priority sector lending.
Aligning the single counterparty exposure limit for banks’ exposure to gold loan NBFCs with that of other NBFCs ie, at 20 per cent of Tier I capital of the bank (against the existing level of 7.5 per cent for gold loan NBFCs) to enhance credit flow to the sector as well as harmonisation of single counterparty exposure limit.
Considering the following relaxations in securitisation/ assignment guidelines to help NBFCs raise funds from banks:
Gold loans may be exempted from the stipulation that assets with bullet repayment of both principal and interest cannot be securitised/ assigned.
Because of the short duration of the loans, gold loans may be exempted from the minimum holding period and minimum retention ratio stipulation.
Allowing gold loan NBFCs to advance against gold coins up to 50 grams, similar to banks.
Ensuring that the branch expansion policy is aligned with that of the banks ie, branch opening does not require a prior approval. The only requirement is to inform the RBI once the branch is opened — this facility can be made available to NBFCs with Credit rating “AA” and above.
Permitting NBFCs with a credit rating of “AA” and above to accept privately-placed NCDs to mobilise savings of retail small investors.
If the economy is to wade through these turbulent times and emerge with only the battle wounds, then it is imperative that all stakeholders in the ecosystem come together and work in a collaborative manner. Considering the role that NBFCs, especially gold loan NBFCs, can play in fulfilling the government’s agenda of inclusive growth, measures (as mentioned above) need to be taken to strengthen their reach and efficacy.
The virus will pass and economic activity will sooner or later get back to normal. However, not all MSMEs will be able to navigate through these turbulent times and the gap that their collapse would leave is not easily filled. A gold loan can act as a life-vest and help us weather this storm.
The writer is Managing Director, Muthoot Finance