Deregulated interest rate on advances

The Government and Reserve Bank of India (RBI) have advice Scheduled Commercial Banks (SCBs) have taken several steps to ensure access of credit to Micro, Small and Medium Enterprises (MSMEs).

This follows several complaints and representations from MSMEs regarding constraints in accessing credit from institutional sources, Finance and Corporate Affairs Minister Nirmala Sitharaman said in a written reply to the Rajya Sabha on 25 June 2019.

These, inter-alia, indicate, insistence on collateral, delayed sanctioning of credit, sanction of lower loan amount as against the required amount and charging of higher rate of interest etc.

The Government and RBI want SCBs to achieve a 20% year-on-year growth in credit to Micro and Small Enterprises (MSEs), allocation of 60% of the MSEs advances to the Micro Enterprise Accounts, a 10% Annual Growth in number of Micro Enterprise Accounts, additional working capital limit to meet the requirements arising due to unforeseen/seasonal increase in demand.

These should also include adoption of one cluster, operationalising at least one specialised MSME Branch in every district, simplified computation of Working Capital of MSE units to make it minimum 20% of the Projected Annual Turnover of the unit for borrowable limits up to Rs.5 crore, setting-up of Trade Receivables Discounting System (TReDS) to solve the problem of delayed payment of MSMEs, etc.

The RBI has deregulated the interest rate on advances and these interest rates are determined by banks with the approval of their respective Board of Directors subject to extant guidelines.

Loans to MSMEs are provided as per the interest rate structure of the bank.

The interest rate is finalized based on various factors which inter-alia include, cost of funds to the institution, credit rating of the unit, tenure of loan, purpose of loan etc. fiinews.com