More steps for MSMEs, weak banks likely at next meeting : 20-11-2018

The Urjit Patel- led RBI may ease the risk weights for lending to micro, small and medium enterprises (MSMEs), helping lenders pare interest rates on loans to small businesses, which have been reeling under the pressure of a credit crunch, apart from facing stress in the wake of payment delays from large companies.

On Monday, the central bank agreed to open a restructuring window for MSMEs, although it initially suggested that small businesses were more prone to loan defaults.

Sources said the decision may come at the next meeting scheduled for December 14, and could be accompanied by a relaxation in the prompt corrective action (PCA) framework for so-called weak banks. The revised stipulation pushes banks into PCA and puts curbs on lending and expansion, based on their classification under the three risk categories. RBI looks at the capital base, asset quality measured by the level of non-performing assets and the profitability that is measured by return on assets.

At Monday’s board meeting, the regulator agreed to relax the first parameter by extending the deadline up to March 2020 for banks to build a capital buffer that can be tapped during tough times. This move will not only help banks conserve capital but also enable them to lend more. As the next step, the government is hoping that RBI will do away with the return on asset criteria that will further ease the pressure on banks.

With the two parameters eased, the government expects some of the 11 state-run banks that are currently under PCA to come out of the framework and to expand and lend faster. “With regard to banks under PCA, it was decided that the matter (PCA) will be examined by the Board for Financial Supervision of RBI,” the regulator said in a statement, indicating that some of the banks may come out of the ambit .

The government has argued that the revised PCA norms that kicked in from April 2017 are more stringent than what was prescribed earlier and has put further pressure on the system. While RBI has maintained that the finance ministry was consulted, officials said that they were unaware of the regulatory move and would have factored in the impact, while allocating more capital to banks.

Source : Economic Times

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