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    Lending rates for MSMEs should decline post RBI measures

    Published on May 22, 2020

    MVIRDC World Trade Center Mumbai welcomes the timely actions taken by Reserve Bank of India (RBI) on May 22, 2020 to provide relief to distressed MSMEs, exporters and large companies amidst the extended lockdown period.

    With this, the responsibility of reducing lending rates has moved to banks so that the ultimate borrowers can benefit from the RBI’s measures immediately.

    Speaking on the measures taken by RBI today, Ms. Rupa Naik, Senior Director, MVIRDC World Trade Center Mumbai said, “We need to see the reduction in repo rate translating into fall in lending rates for borrowers. MSMEs are borrowing at more than 8.0%, even though the RBI’s repo rate has been reduced 115 basis points since March 27 to the current level of 4.0%. Since April 17, the 5-year corporate bond rate has fallen hardly 48 basis points. I hope in the days to come, we will see decline in interest rates for the ultimate borrowers.”

    Ms. Naik lauded the RBI for offering line of credit to EXIM Bank, extending the moratorium period for repayment of loans, and reducing the policy interest rate by 40 basis points.

    Ms. Naik remarked, “Exporters who are facing delay in getting payments from their overseas clients were anxiously waiting for relaxation in the timeline of their shipment credit. I hope the RBI’s move to increase the permissible period for pre-shipment and post-shipment credit will benefit these exporters.”

    These measures, together with the measures announced by Government of India last week will cushion the short-term liquidity needs of MSMEs, who are the mainstay of employment creation, exports and economic growth. On May 13, Government of India announced Rs. 3 lakh crore worth of emergency credit lines for 45 lakh MSMEs and Rs. 20,000 crore worth of subordinate debt facility for 2 lakh MSMEs, who are unable to repay bank loans.

    Speaking about future course of action for policymakers, Ms. Naik suggested, “In future, depending on the evolution of the circumstance, RBI should provide for one-time restructuring of MSME loans so that these enterprises are not burdened with immediate loan repayment obligation after the lockdown.”

    Ms. Naik also suggested early relaxation of industrial activity in safe areas within red zones with adequate safety protocols so that MSMEs can restart their operations and minimize their losses. According to an estimate by Reserve Bank of India, the top 6 industrialised states that account for about 60% of industrial output are largely in red or orange zones, where economic activity is restricted.

    She said, “RBI and government’s move to provide liquidity support to MSMEs will be meaningful only if they are allowed to operate in a timely manner. MSMEs can take fresh loans only if they are allowed to restart their operations. We need the coordination of all state governments to restore supply chains that span across state borders.”

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