How to effectively address additional requirements faced by borrowers/ clients is always on the table of any financial institution all, but more so in times when the clients are under stress and looking for innovative, box solutions. From a pragmatic perspective, the FI has the option to either provide succour ( by way of top-up/bridge loan ) to ease out the client or face the prospect of the client’s business going bust on account of unavailability of additional funds from the lender’s end.
Top-up credit/bridge works like a booster to unplug the flow of movement in the working capital cycle of an MSME client. However, from the lender’s perspective, FI is also faced with an unenviable probability/prospect of the entire exercise falling flat, thus increasing the NPA and thus the recovery burden of the exposure. So possibly a viable path would be, for the client to make efforts to provide comfort to the lender by providing evidence of valid reasons for clogging the working capital cycle, coming up with a time frame by which easing could happen, also coming up with a pipeline as possible. However, both the FI and the lender have to go the extra mile to come up with tailor-made solutions.
The issue of waiver of interest brings in dimensions like change in IRAC norms and needs approval at a higher level in most FIs. But timely re-scheduling with interest deferral/ waiver is an option to be exercised liberally by FIs in these extraordinary times.
How Can A Financial Institution Promote Risk Management In The MSME Sector?
The FI can promote risk mitigation in the MSME sector by encouraging & rewarding good practices like having a BCP & DR, doing due diligence for employees, following standard KYC norms for its customers, and following high levels of compliance standards. In my view, this is best promoted when these factors are built into the appraisal matrix and also given publicity to encourage clients to go for these measures to avail of benefits.
Which Functions Get Most Impacted In The Wake Of A Disaster?
The functions which get impacted most during a disaster are manual (as opposed to automated) and also the ones which are dependent on systems if the DR backup system is not fully functional. The effort should be to build in a well-thought-out BCP DR and keep testing the same at the required periodicity.
What Kind Of Bcp Does A Financial Institution Check Out Whilst Giving An Advance?
With a growing realisation that disasters would keep happening irrespective of the best human efforts to avert them same, the FIs these days are making a clear distinction between clients who have invested in a BCP DR to increase their resilience and those who haven’t. With the financial regulators also pushing for this, having a well-tested BCP, a clear plan to handle a DR event, the conduct of awareness programs for staff, also having a clear line of command with an updated call tree are some of the key parameters that the FIs are keen to see in place.
Blog written by: Ashutosh Mishra, Chief Risk Manager, NABARD (Ministry of Finance, Government of India)