A recent report by the Parliamentary Standing Committee on Commerce, has called for different weightage to different sectors of the industry by credit rating agencies, to ensure that banks don't deprive the micro small and medium enterprises (MSME) of credit. The observations came after the committee noted that the rules introduced by Reserve Bank of India (RBI) to help banks to counter the non performing asset (NPA) problem have hit the MSMEs very hard.
The committee, headed by Shiromani Akali Dal leader Naresh Gujral, said that a set of rules have been put in place by the RBI under Prompt Corrective Action (PCA) framework to assess, monitor and take corrective action on banks which are weak and troubled has resulted in a reduction in credit flow to MSMEs.
The April 2017 decision of RBI to tighten the rules under the PCA framework and to put 11 public sector banks under PCA significantly affected the lending process in these banks, the committee noted. According to it, a significant part of the financing needs of MSME were serviced through the public sector banks, and hence, MSMEs, caught in the churn are struggling to meet their financial needs. It wants RBI to consider exempting bank credit to MSMEs from the purview of PCA restrictions. "Similar arrangement for differential treatment for MSMEs has also been envisaged in the recent amendment of the Insolvency & Bankruptcy Code as the sector was put to disproportionate pressure," the report notes.
The committee points out that preference and concessions given by banks to the 'AAA' or 'AA' credit rated firms has deprived a large part of MSME sector from easy access to bank finance. "The credit rating agencies assess every firm with the same scale without taking into account the characteristic, nature and size of the unit. Instead of strengthening their internal risk appraisal mechanism, the banks have assigned their responsibility to third party agencies. Banks must be alive to their responsibility. The prudence expected of the banks should not be used as an alibi to kill entrepreneurship," the report said.
The committee recommends that due weightage to local vagaries specific to the industry must be taken into consideration by the credit rating agencies while awarding ratings to the firms. "The SEBI must be engaged to take necessary action in this regard. Further, the banks must also strengthen their credit appraisal frameworks so that they can undertake in-house risk appraisals of a project in a professional manner," the committee suggested.