There are no free lunches. And if you expect it from a fiscally constrained government, you are badly mistaken.
The case in point is the 100 per cent guarantee cover thrown up by the government for risk averse banks and financial institutions to support the micro, small and medium enterprises (MSMEs) by giving them additional credit during the current challenging times.
The scheme covers additional 20 per cent loans for MSME borrowers with existing loan up to Rs 20 crore. This guarantee cover would be offered by the six-year old National Credit Guarantee Trustee Company (NCGTC) under a separate fund of Rs 41,600 crore.
On the face of it, the guarantee scheme is a great deal for banks as there is no risk of losing money. In addition, there is also no provision of creating risk weights from capital on loans. But in reality, it is going to be a tough task for banks to get the full guaranteed amount from the guarantee corporation.
The scheme provides for only 75 per cent guaranteed amount once the default triggers, while the balance 25 per cent will be released only after the completion of the recovery proceedings. There are always delays in recovering a loan because of litigation and offers and counter offers under the insolvency and bankruptcy code. For many smaller accounts, there are hardly any buyers that leads to eventual destruction of capital.
The bankers will also have to make proper due diligence at the time of sanctioning the additional loan facility. They will have to apply the same credit appraisal tools as they apply in the normal course when there is no guarantee cover. In fact, the lending bank will come under the scanner if there are acts of omission or commission.
The onus will come on the lending bank to make genuine efforts to recover the entire amount which will be under default. The guarantee corporation also has the right to demand the steps taken by the lenders to recover the outstanding amount. This will increase the compliance burden of the banks because of files and data moving to and fro.
If there are any recoveries made in the account, it is the responsibility of the lender to inform the guarantee corporation. In fact, there should be no delays in sending the recovered amount to the corporation, otherwise they will slap penalties.