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Last updated: 11 Aug, 2020  

RBI.Thmb.jpg RBI push to MSMEs, start-ups

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Bikky Khosla | 09 Aug, 2019

Contrary to expectations, the RBI, in its Monetary Policy Committee meet last week, retained the repo rate -- or short-term lending rate for commercial banks at 4 percent. The central bank had already cut repo rate by 115 basis points in the last seven months, but given that the Indian economy is still struggling the effects of the COVID-19 crisis and lockdowns taken to limit the spread of the virus, economists and industrialists expected another dose of repo rate cut. But it hasn’t happened.

But the MPC announced a major restructuring package for stressed MSME loans which banks and NBFCs have been strongly pitching for. It extended a scheme whereby stressed MSME borrowers will become eligible for restructuring their debt, provided their accounts with lenders were classified as 'standard' as on March 1, 2020. In other words, the existing loans to MSMEs classified as 'standard' will now be re-structured without a downgrade in the asset classification.

In another welcome move, the central bank has given priority sector lending status to start-ups. This will definitely help our start-ups. Under PSL, RBI directs banks to provide a specified portion of the bank lending to few specific sectors, and now with PSL status given to start-ups, it can be expected that it will be easier for thousands of start-ups functioning in different fields to access timely and adequate bank credit.

Meanwhile, questions are there why RBI didn’t cut repo rates. Latest official data shows that retail inflation rose in June to 6.09 percent from 5.84 percent in March. This is more than the RBI’s medium-term target range of 2-6 percent. Second, despite the 115 bps rate cut in last seven months, transmission by banks to customers is still to kick in fully. Also, global economic activity is still fragile and real GDP growth is still expected to remain in the negative. This is probably why the RBI pressed the pause button as of now.

I invite your opinions.

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