RRBs to extend credit for MSMEs

In News

• RRBs will soon extend credit for education, housing and even small businesses in rural India.

More about the news

• About:
  • To provide credit to rural consumers, the government is planning to leverage the 15,000-odd strong network of the 43 Regional Rural Banks (RRBs) in the country by asking them to expand their portfolio by adding new segments.
    • Rural banks, for instance, would be asked to look beyond crop loans and also provide loans for tractors, small businesses, education and housing loans in rural areas. 
• Background:
  • This push to the RRBs by the government comes at a time when the Department of Financial Services has flagged concerns about public-sector banks having slowed lending to education loans.
  • This is due to higher defaults and the continuing struggle of the Micro Small and Medium Enterprise (MSME) sector 
    • MSME has suffered the most in the wake of the Covid-19 pandemic and national and local lockdowns.
• EASE reforms:
  • The initiatives and targets will be part of the Enhanced Access & Service Excellence (EASE) reforms being undertaken by the Centre. 
    • EASE reforms were launched in 2018 for the public sector banks and are currently in their fifth phase.
• The rural advantage
  • Providing RRBs a new mandate may serve two purposes: 
    • It will help them expand their business by leveraging their huge rural network and local understanding, and 
    • It will also enhance credit access to rural consumers for purposes such as education, housing and micro businesses.

MSME Sector In India 

• About:
  • The Micro Small and Medium Enterprises (MSMEs) sector is a major contributor to the socio-economic development of the country. 
  • In India, the sector has gained significant importance due to its contribution to the Gross Domestic Product (GDP) of the country and exports. 
  • The sector has also contributed immensely with respect to entrepreneurship development especially in semi-urban and rural areas of India.
• Financial challenges Faced by MSME Sector in India
  • Mounting NPAs if MSMEs:
    • According to the RBI, bad loans of MSMEs now account for 9.6 per cent of gross advances of Rs 17.33 lakh crore as against 8.2 per cent in 2020.
    • The MSME sector was among the most pandemic afflicted sectors. Thousands of MSMEs either shut down or became sick after the government announced a nationwide strict lockdown.
    • Restructuring schemes and packages didn’t benefit thousands of units which were already in default.
  • Non-availability/Delays of Funds:
    • Mounting losses and debts, non-availability of proper financial help and delays from the government, reluctance from the banks for the funding, etc.
    • MSMEs in India typically rely on NBFCs for their financing needs, which in itself has been enduring a liquidity crunch since September 2018.

• Steps taken to revive the position:
  • To revive activity, the RBI and the government introduced several measures including the Emergency Credit Line Guarantee Scheme (ECLGS) which provided Rs 3 lakh crore of unsecured loans to MSMEs and businesses.
  • The RBI also extended the scheme of one-time restructuring of loans to MSMEs without an asset classification downgrade and permitted bank lending to NBFCs for on-lending to agriculture, MSMEs and housing to be classified as priority sector lending (PSL).
  • ASPIRE scheme, Credit Guarantee Scheme, Credit Linked Capital Subsidy Scheme (CLCSS), Zero Defect Zero Effect model, etc.

Source: TH