Loan to MSMEs likely to become risk-free

Loan to MSMEs likely to become risk-free

Part of: GS-Prelims and GS-III – Economy

In News:

• The RBI is likely to allow banks to assign zero risk weight for loans that will be extended to the MSMEs under the economic package announced by the government earlier.

Key takeaways 

• As a part of the package, Rs.3 lakh crore loan for the MSME sector was announced.
• However, such loans would attract a risk weight of a minimum 20% since these loans did not come with direct government guarantee.
• This facility is similar to the loans that are guaranteed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
• Zero risk would mean that banks will not have to set aside additional capital for these loans.
• The move will encourage lenders to extend credit. 

Important value additions 

Rs. 3 lakh crore scheme

• Under the scheme, 100% guarantee coverage will be provided by the National Credit Guarantee Trustee Company Limited (NCGTC) to eligible MSMEs, in the form of a Guaranteed Emergency Credit Line (GECL) facility.
• Other small borrowers including the Non-banking Financial Companies (NBFCs) can also avail this scheme.
• The tenure of loan under this scheme is four years with a moratorium period of one year. 
• The scheme would be applicable to all loans sanctioned under GECL till 31st October, 2020 or till an amount of Rs.3 lakh crore is sanctioned, whichever is earlier.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) 

• The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS) was launched by the Government of India (GoI) to make available collateral-free credit to the micro and small enterprise sector. 
• Both the existing and the new enterprises are eligible to be covered under the scheme. 
• The Ministry of MSMEs and Small Industries Development Bank of India (SIDBI) established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the scheme. 

National Credit Guarantee Trustee Company Limited

• It is a Union Government Company which is classified as a company limited by shares.
• It was set up by the Government to act as a common trustee company to manage and operate various credit guarantee trust funds.