Full guarantee may push banks to lend 

#GS3 #Economy 

Non-banking financial institutions expect an increase in banks’ appetite for lower rated papers 

  • Risk-averse banks may now have the appetite to resume lending operations, with the government deciding to provide full guarantee for the loans extended by them to borrowers to kick start the economy paralysed by the COVID-19 lockdown. 
  • This 100% credit guarantee will mean that banks do not have to make any provision for the loans, that is, they do not have to set aside capital in case the account turns non-performing. 
  • In case the government is directly providing the guarantee, there will be no risk weight attached to the loans.  
  • The measures for MSMEs through guarantees, equity infusion and debt support will incentivise bank lending to MSMEs as well as providing crucial support to stressed entities in the current situation. 
  • On banks’ reluctance to lend, which is evident from over ₹8 lakh crore being parked by these lenders with the RBI’s reverse repo window.  
  • As a result, banks have no other option but to keep the funds with the RBI. 

Liquidity for NBFCs 

  • With the government announcing a ₹30,000-crore special liquidity scheme for NBFCs, which will be provided by the banks, the non-banking finance companies now expect bank funding to start.  
  • While announcing the scheme, the government said investment would be made in primary and secondary market transactions in investment grade debt paper of NBFCs, HFCs and MFIs.  
  • Such investments will be 100% guaranteed by the government. NBFCs expect that banks will now be more willing to tap the RBI’s special window for liquidity exclusively meant for them.  
  • Banks were reluctant to borrow in the first such auction — only about 50% amount was availed by them out of the notified amount of ₹25,000 crore.  
  • NBFCs also expect partial credit guarantee scheme will boost banks’ confidence to lend. 
  • The scheme will cover the borrowings of lower-rated NBFCs, HFCs and micro finance institutions (MFIs) and the government will provide 20% first loss sovereign guarantee to public sector banks.  
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