Govt-backed credit guarantee needed to ensure banks overcome risk averseness while lending: CII

New Delhi: The government should provide partial credit guarantee to banks as a shield from risk averseness arising out of lending to non-banking financial and microfinance companies, as liquidity is needed at a time when the economy is suffering a blow due to the global coronavirus outbreak, industry body CII said on Sunday.

Given the current crisis in the economy and the urgent need for liquidity to flow into non-banking financial companies (NBFCs) and microfinance institutions (MFIs), the Confederation of Indian Industry (CII) urged the government to provide partial backstop guarantees.

This will ensure banks to overcome their risk averseness and enable full fructification of the Reserve Bank of India’s (RBI) timely intervention announced on Friday, it said in a release on Sunday.

The industry lobby hailed the second round of liquidity support for the financial sector, terming it “timely” and “far reaching”.

It is targeted towards ensuring flow of credit towards the NBFCs that in turn lend to small and medium enterprises and the farm community.

To tackle the current crisis arisen from the COVID-19 outbreak and the consequent nationwide lockdown, the government and the RBI have announced many measures to ease the stress of businesses.

To instill the necessary confidence into the banking system to participate in the auction and lend to such entities, the CII recommended that the government should provide backstop facility in the form of the partial credit guarantee scheme with the amount of overall guarantee being limited to loss of up to 20-30 per cent of the amount being lent by the banks under the scheme.

There will be no immediate impact on the fiscal deficit, as this will be a contingent liability.

“This step will provide the necessary confidence and assurance to the banks and encourage them to participate in the auction and disburse much needed cash flows to the investment grade options of MFIs and NBFCs,” said CII Director General Chandrajit Banerjee.

He said the measures announced by the RBI, particularly the targeted long-term repo operation 2.0 (TLTRO 2.0) which the central bank mandates an allocation of 50 per cent towards medium and small-sized NBFCs and MFIs, have come as big relief to them.

It is expected to provide access to the much-needed liquidity to these entities, Banerjee said.

The industry body said that under the prevailing scenario, the health of the industry and financial sector has taken a dip and the banks are becoming more and more risk averse.

Due to subdued risk appetite of banks, it is expected that the auctions under TLTRO 2.0 may see a lacklustre response from the banks, the CII said.

Also, taking cognisance from the results of the past auctions, it is likely that the intent of the RBI to infuse liquidity into the system through small- and medium-sized NBFCs and MFIs may not fructify.

“In this hour of need, NBFC and MFI sector has the ability to ensure smooth and continuous flow of credit, particularly to MSMEs (micro, small and medium enterprises), farm sector and retail sector and ensure that they are able to earn their livelihood, provide employment to lower income group, make timely payment of salary and wages and do not go through financial distress,” it added.

The coronavirus pandemic has created an uncertainty which is hard to measure.

The impact of COVID-19 has been much worse than the financial crisis faced by the world including India in 2008. Along with the economic fallout, the current situation can be touted as the worst human catastrophe after the two world wars, the CII said. 

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