Credit guarantee and interest subsidy scheme announced to boost lending

• CB says scheme will be launched on July 1
• To operate in parallel with Rs.150bn Saubagya scheme
• Credit guarantee to range between 50% to 80% considering loan size 
• 5% interest subsidy announced for banks to cover cost of funds 

The Central Bank (CB) yesterday announced a credit guarantee and interest subsidy scheme with a view to further accelerate lending by the banking sector to COVID-19 hit businesses in the country.

The CB said the scheme will be launched on July 1st and will operate in parallel with the Rs.150 billion Saubagya COVID-19 Renaissance Facility.

The Monetary Board of the CB, at its meeting held last Friday, approved the scheme under Section 83 of the Monetary Law Act, within the already announced threshold of Rs.150 billion.

Under the announced scheme, the CB noted that it would provide credit guarantees to banks, ranging from 80 percent for smaller loans to 50 percent for relatively large loans, enabling banks to grant loans to address working capital requirements of affected businesses.

“With the Central Bank absorbing a significantly higher percentage of the credit risk, banks can extend their lending to vulnerable businesses focusing on the viability and cash-flows of such businesses rather than collateral,” the CB pointed out.

Despite excess liquidity in the market, the banks have been slow in lending to COVID-19 hit businesses in the country, in particular to SMEs, mainly due to potential impacts on already deteriorating assets quality. 

Hence, industry experts and economists have been proposing a State-backed credit guarantee scheme to mitigate risks for the banking system and boost lending to businesses. 
The CB also announced that it would provide an interest subsidy of 5 percent to cover the banks’ cost of funds.

The CB expects that the banks would utilise their own funds, particularly the additional liquidity of close to Rs.180 billion provided through the cumulative reduction in the Statutory Reserve Ratio (SRR) by 300 basis points thus far during the pandemic period to grant loans at 4 percent interest to businesses.

The operating instructions of the announced schemes are expected to be issued to the banking sector in immediate due course.