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Working capital MSME loans will be priority sector lending

NPA recognition given a longer window

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Bank lending to the micro, small and medium enterprises (MSMEs) will rise sharply after Reserve Bank of India (RBI) allowed lenders to classify all working capital limits to these units as priority sector lending (PSL).

Earlier, only working capital loans up to Rs 5 crore to the micro and medium and up to Rs 10 crore to the small scale industries were allowed to be classified as priority sector lending. Investment into plant and machinery, however, will not qualify for PSL beyond certain limits.

In another announcement, RBI has now given the GST-registered MSME units a 180-period window to repay their dues between September 1, 2017, and January 31, 2018, if their dues to the banks were standard as on August 31, 2017. All loans up to a limit of Rs 25 crore will enjoy the extended repayment schedule.

Battered first by the demonetization and then by the goods and services tax (GST), the sector is suffering huge losses with many units shutting down. These reliefs will be able to resuscitate the sector, according to bankers.

Total bank lending to the MSME sector up to December 2017 was Rs 26.34 lakh crore according to the latest RBI data. But the classification will apply only to fresh lending to the sector.

Praveen Kumar Gupta, managing director, State Bank of India (SBI), told DNA Money, "The NPA recognition is a small relief. But the lending to the MSME sector is likely to go up as banks get the opportunity to classify these loans as priority sector loans."

Some of the lenders, especially the private sector banks, struggle to meet their priority sector obligations, which is 40% of the total bank credit during the financial year.

Rajkiran Rai, chief executive director and managing director, Union Bank of India, said, "This will be a big relief for the MSME sector as working capital limits will go up sharply as this will also be counted as priority sector exposures. Many units had huge working capital demands even if investment in plant and machinery was low."

In the Union Budget announced last week, the government also reduced the corporate tax rate for the MSME sector from the existing 30% to 25% for units with a turnover of Rs 250 crore.

"Policy relaxation given to MSME sector for the overdue payment and the removal of credit caps on MSMEs (services) under priority sector augurs well for both MSMEs and banks and will help in increasing the credit flow to the MSME sector which has been affected by the demonetization and GST," said Usha Ananthasubramanian, chairman of Indian Banks' Association (IBA) and MD and CEO of Allahabad Bank.

Dinabandhu Mohapatra, MD and CEO, Bank of India, told DNA Money, "Many units in the sector were stuck for finance. These announcements will be a great support. Across all MSME segments, there were problems of scarcity of cash."

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