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Loans to MSMEs to get 'risk-free' tag: Explained

Under the Rs. 20 lakh crore economic package announced by the Finance Minister, the Reserve Bank of India (RBI) will allow the banks to assign 'zero risks' weight for loans which will be extended to the MSMEs.

Finance Minister Nirmala Sitharaman announced Rs. 20 lakh crore Aatma Nirbhar Abhiyan package to ease the economic distress amid the coronavirus chaos. Under this package, the Reserve Bank of India (RBI) will allow the banks to assign 'zero risks' weight for loans which will be extended to the MSMEs (Micro, Medium and Small Enterprises). 
Zero risk means that the government will take the full guarantee of the loans provided by banks to the MSMEs and the banks will not have to set aside additional capital for these loans. This, in turn, will encourage banks to lend the loans as the banks have turned risk-averse and reluctant to lend.
Finance Minister Nirmala Sitharaman announced Rs. 3 lakh crore loan for the MSMEs under the Aatma Nirbhar economic package. A corpus of Rs. 41,600 crore has been made available by the government for the coming years. The  National Credit Guarantee Trustee Company Limited (NCGTC) will provide a guarantee to these loans in the form of GECL (Guaranteed Emergency Credit Line) facility. 
These loans will have a 20% risk weightage as they are not sanctioned under direct government guarantee. This facility is the same as the loans that are guaranteed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
The Finance Ministry has asked the Reserve Bank of India to waive off the requirement of assigning a risk weight to the loans after the banks raised this issue with the government. 
Under the Rs. 3 lakh crore scheme announced by the Finance Minister Nirmala Sitharaman, 100% guarantee will be provided by the NCGTC to all the eligible MSMEs. This scheme is primarily for the MSMEs, but the small borrowers including  Non-banking Financial Companies (NBFCs) can also avail of the scheme.
Under this scheme, the period of the loan is 4 years and a moratorium of one year will be given on the principal amount. The scheme announced by the Finance Ministry will be applicable to all the loans sanctioned under GECL till October 31, 2020, or till the said amount is sanctioned, whichever is earlier. Also, no guarantee fee will be charged by the NCGTC.
Finance Minister has asked the banks to extend loans automatically to eligible borrowers without fear of the ‘3Cs’ — CBI, CVC and CAG. If the loans are given by the banks and financial institutions, then the interest rate will be 9.25% and if the loans are provided by the NBFCs, then the interest rate will be 14%. 

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