FM Nirmala Sitharaman’s MSME loans not disbursed–Economic Times

Clipped from: https://economictimes.indiatimes.com

Finance Minister Nirmala Sitharaman presented a cleverly devised fiscal stimulus cum liquidity package of Rs 20 lakhs crore (10% of GDP) whose direct impact on the treasury would be less than Rs 1.5 lakh crore or 0.75% of the GDP as per Barclay’s Bank and 0.8% of the GDP as per Edelweiss economist Madhavi Arora. As a result of this stimulus the budget deficit for the year would possibly increase to 6% of the GDP which would be manageable even in such a difficult year when revenues would be under pressure. This approach though prudent came under intense criticism for doing too little and too late. However considering that elections are four years away, I doubt if any other political party would have acted differently, given the circumstances. So instead of analysing the merits and demerits of the stimulus package, I thought of finding its true effectiveness, nearly two weeks after the stimulus was declared by the Finance Minister.

Giving loans is not an essential activity

As the first initiative of the Finance Minister was the Rs 3 lakh crore liquidity infusion to the MSME sector, I decided to speak to a few entrepreneurs of my PAN IIT group who were operating MSME units to find out its effectiveness. Only one of the three businesses I spoke to said he had received an email from his bank that his MSME unit has been sanctioned a 10% increase in working capital limits under the credit guarantee scheme. So I asked him if he had availed the offer and he said the loan would be released by the bank only after the lockdowns were lifted.

Thereafter I spoke to a few banker friends on what would be the implementation time frame. One branch manager said that his bank was operating with a skeleton staff and no loans were being released. Another private sector bank manager told me that he had received no such notification from HQ. A third branch manager of a Public Sector Bank confirmed that the printed instructions for the automatic enhancement of bank loans to MSME’s had been received at his branch two days ago, but the loans would be given only after the lockdown was over. When I told him that lockdowns could be further extended for weeks if not for months, he told me that he could do nothing about that, as that was the Government’s prerogative.

On further pursuance he let me know that there were two reasons why the loans could not be disbursed. Firstly the banks were undertaking only essential services during the lockdown period as per directives. This included cash deposits, withdrawals, salary and pension payments, clearing of cheques, remittances, besides all interbank and government transactions. “Giving loans were not part of essential services and would have to wait till lockdowns are lifted. The most visible activity at our branch nowadays is the long queue of people withdrawing the recently sanctioned disbursal of Rs 500 from their Jan Dhan accounts. We are working full time but with limited staff due to COVID-19” he said.

The second reason why loans can’t be disbursed was the non-availability of stamp papers for the bank guarantees that are needed before the release of loans. He said though the branch was in Delhi, his MSME clients were mostly from Noida, Ghaziabad, Faridabad and Gurgaon where maximum small scale industries are located. “Courts in Delhi, U.P. and Haryana are all closed and there is no sale of stamp paper. For processing the loan the bank guarantee has to be given on the stamp paper and it has to be duly certified by the notary. Only then the loan documents can be processed and the amounts released to the MSME units” he clarified. When I told him that technically since the credit guarantee is given by the central Government, the BG should be waived, he replied “that even then an order from the legal department of our head office would be needed, specifying the exemption of BG.”

Extended lockdowns will undermine 5 years of banking reforms

Since 2015 India has been engaged in a hard-fought battle to clean up an over-borrowed and corrupted banking system with path-breaking reforms that included identification of stressed assets, formulation of the bankruptcy laws, setting up of the NCLT courts and lengthy and arduous legal battles with crony capitalists to sell of the stressed assets and arrest them for frauds and money laundering. The banking reforms have not been easy but are only half done. A big challenge would be to recapitalise the merged banks and make them healthy

But banks cannot be healthy if Industry and retail businesses are making deep losses. After all 35% of the bank credit has been availed by industries and 25% by retail business. At the end of the first lockdown, FICCI President Sangita Reddy said “Estimates show that India may be losing close to Rs 40,000 crore daily due to the nationwide lockdown with an estimated loss amounting to Rs 7-8 lakh crore during the past 21 days. If that estimate is considered as accurate, we have already lost Rs 25 lakh crore (over 10% of GDP) in the lockdown that will now exceed 60 days. All these losses will ultimately have to be borne by the banking sector and the longer the lockdown more challenging will it get for industries and banks.

The bad news is that many businesses are not functioning despite some relaxation in lockdown rules. Across industry there is uncertainty and people are unsure whether they would lose less money if they stayed closed or if they opened up 33% as per the Governments directive. One machinery manufacturer who has a total of 132 suppliers of bought out parts did not start manufacturing despite permission because 19 of his suppliers wherein containment zones and expressed inability to supply and 24 were in different states and could not guarantee that part truckload of material would be transported or even permitted to cross state borders. The writing is on the wall. Bureaucrats of state and the centre cannot micro-manage how diverse businesses are run and supply chains function. Despite the possible health risks involved, the lockdowns must go, but safety measures must stay. Else the good work of banking reforms done by the Modi Government would all evaporate, if lockdowns are extended with or without relaxations.

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