In the wake of second wave of Covid-19 infections, the Reserve Bank of India announced a three-year special long-term funding facility for small finance banks to borrow at repo rate and on-lend to micro and small businesses.
From the funds borrowed by tapping the Rs 10,000-crore facility, small finance banks can lend up to Rs 10 lakh per borrower till Oct. 31, RBI Governor Shaktikanta Das said while announcing fresh measures on Wednesday.
That comes as several Indian states have announced local lockdowns to battle a severe second surge of the pandemic, disrupting economic activity. The curbs threaten to hurt a nascent recovery after India recorded first contraction in more than four decades in FY21.
Small finance banks have been acting as the last-mile supply of credit to individuals and small businesses, Das said. The special window, he said, has been announced to provide further support to small business units, micro and small industries, and other unorganised sector entities who are adversely affected during the second wave of the pandemic.
The move, according to PN Vasudevan, managing director and chief executive at Equitas Small Finance Bank Ltd., would help such lenders more from the perspective of interest rate arbitrage than the liquidity front, which is already ample in the system.
“It will help us ease lending to small business borrowers, who are largely underserved by the mainstream banks because of difficulties in their credit assessment,” he said. “But, now it becomes much easier for us to help such borrowers bounce back from disruptions in their businesses due to the second Covid wave.”
Besides reducing cost of funds for lending to small businesses, the RBI’s dispensation also helps in extending credit to the self-employed, the worst-hit segment during the pandemic, according to Samit Ghosh, founder of Ujjivan Small Finance Bank Ltd.