DNA Edit – Easing credit: Government and the RBI are on the same page

RBI’s credit easing has begun. In what could only be described as a New Year gift to micro, small and medium enterprises (MSME), the central bank has allowed a one-time restructuring of existing debt up to Rs 25 crore for companies that have defaulted on payment. Loans given to them will continue, however, to be classified as standard assets, the decision taken on Tuesday said. It will help the MSMEs, which are facing a cash crunch in the wake of demonetisation and GST implementation. This decision, at one stroke, makes it clear that the battle of attrition between the government and the RBI, which had an important role to play in the exit of former RBI Governor Urjit Patel, has come to an end. 

The RBI Board in its crucial meeting held on November 19 last year, had advised the central bank to examine a scheme for the restructuring of stressed assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore, subject to such conditions as are necessary to ensure stability. At that meeting, a detailed presentation made by Financial Services Secretary Rajiv Kumar highlighted the extreme cash crunch faced by MSMEs. It was a signal — if any signal was indeed needed — that the subject of easing credit to small industries figured very high on the list of this government’s priorities. Patel’s reluctance to do so had led to tensions, with RBI deputy governors on one side and government representatives on the other. The perceived differences with the RBI had then led to the government invoking, for the first time, a provision in the RBI Act to start the formal process of consultation with the RBI Governor on such issues as easing the prompt corrective action (PCA) framework for PSU banks, boosting liquidity and credit to MSMEs and non-banking finance companies (NBFC) and transferring additional surplus from the RBI to the government. 

A relaxation in PCA norms will help state-owned banks kick start lending to MSMEs. It would be instructive to remember that within three weeks of the central bank’s reluctance to ease lending to MSMEs, Patel had put in his papers citing ‘personal reasons’. For the government, that is now a problem of the past and the appointment of Shaktikanta Das as a former civil servant with experience in the economic ministries, is going to come handy. To be eligible for the scheme, the aggregate exposure, including non-fund based facilities of banks and NBFCs to a borrower should not exceed Rs 25 crore as on January 1, 2019. The restructuring has to be implemented by March 31, 2020. Just how much the government desired the move can be gauged from the fact that it was welcomed by Swadeshi ideologue and RBI Board member S Gurumurthy. He was among those on the RBI Board, who had pushed hard for relief to the MSME sector, for reasons that are important in political terms. It provides employment to 12 crore people and is second only to the agriculture sector, as a potential vote bank.