NBFCs seek ‘flexibility’ in loans to MSMEs, refinancing facility for subsequent small business loans


Credit and Financing for MSMEs: In November 2021, the RBI asked lenders to classify borrowers’ accounts as overdue as part of their end-of-day process, regardless of when that process was performed.

Credit and financing for MSMEs: Non-bank financial corporations (NBFCs) have called on the government to treat retail loans to small businesses and individuals differently from loans to large businesses. Urging “flexibility” in loans to small businesses, the Finance Industry Development Council, which represents NBFCs, suggested in its budget recommendations that loans to individuals and MSMEs up to Rs 2 crore should be allowed to be marked as special mention account (SMA) or non-performing asset (NPA) at the end of the month.

The suggestion came in the context of the clarification of asset classification standards issued by the Reserve Bank of India (RBI) in November, in which lenders were asked to classify borrowers’ accounts as overdue as part of their end-of-day process, regardless of when that process is executed. . Likewise, lenders should also classify accounts as ADM as well as NPA according to the end of day process for the relevant date instead of the end of the month.

Therefore, if the payment takes more than 30 days from January 16, for example, the overdue amount will become overdue and postcode after 90 days. This was in contrast to looking at the end of the month to classify the account as overdue or NPA in case the payment is not received. This could impact the NBFC’s NPAs for a while.

“SMEs generally suffer from variable late payments from large companies in terms of making their sales. In the absence of penalties for large entities, which do not pay their SME suppliers on time, imposing a day-based SMA / NPA report would be unfair for MSMEs, ”said the IFCD. “The rule of classifying the account standard after receipt of full payment will certainly have an impact on the overall amount of NPAs, but one can only guess how high it would be,” Madan Sabnavis, economist, told Financial Express Online. in chief, Care Ratings.

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The IFCD also urged the government to maintain the current rule of reclassifying accounts classified as NPA to the standard category with partial repayment of arrears. The RBI had said that loan accounts can only be reclassified to the “standard level if all interest and principal arrears are paid by the borrower to avoid any ambiguity because” some lending institutions reclassify accounts classified as NPA towards the “standard” asset class when paying only interest on late payments, partial delays, and so on.

As most NBFCs, except the highly rated ones, depend on banks for their funding needs, this results in insufficient and erratic flow of funds to NBFCs and increased concentration risk at the systemic level, the Bank said. FIDC. To remedy this, the federation also urged the government to set up a refinancing mechanism for the regularity of the sources of financing of NBFCs.

“The cost of capital for NBFCs has skyrocketed. The bank rate has fallen by around 150 basis points over the past two years, while the cost of borrowing for smaller NBFCs has increased and the spread widened by 300 basis points. So there must be more efficient ways of getting capital to NBFCs and lending it to MSMEs, ”Alok Mittal, co-founder and CEO of Indifi Technologies, told Financial Express Online.

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