Experts have underlined the need for a relook at the differential rates structure with a view to helping the COVID-19-hit MSME sector entities and small corporates which often fail to obtain loan at better and competitive interest rates from banks and lending institutions. Lower interest rates, the experts said, will make the MSMEs more competitive and help tide over the impact of the coronavirus pandemic.

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Under the differential rates structure, the companies with high credit rate get loans from lending institutions at low rates, while those not having good ratings have to pay higher rates. The differential, according to experts, should be low at this juncture to enable the companies to come out of the crisis situation. ”Many of the corporates having investment grade rating are charged interest relatively higher than the highest rated corporates which puts them in a disadvantageous position and their costs remain high. Therefore, if these corporates are also offered better rates, they will be more competitive. With reduction in differential such borrowers will converge towards better rate of interest, said Sushil Kumar Goyal, former executive director of Oriental Bank of Commerce.

Noting that in view of the current pandemic situation most of the borrowers are facing challenging times, he said, in case the incidence of interest rate burden is reduced their viability is expected to be stabilized. Also, there is a need to tweak the risk weight by RBI to the differently rated borrowers in such a way so as to enable the banks to offer better rate of interest to them. According to Abhishek Chauhan, executive director, Indiforward there is a case for restructuring the differential rates structure in view of the disruption of normal business activity on account of coronavirus pandemic.

Differential rates in view of the disruption in normal business activity due to Covid should be there but in a very much structured way within stipulations, he said. Under the present circumstances, Chauhan said that it was imperative to have an independent assessment for borrower.

Expressing similar views, Jyoti Prakash Gadia, Managing Director, Resurgent India said that banks could go an extra mile to help MSMEs by not insisting on external credit rating up to a level of exposure. Banks can have relatively lenient/ liberal policies for MSME by not insisting on an external credit rating up to a particular level of exposure. In such cases, the interest rate can be determined based on the internal rating itself, Gadia said, adding that lenders can evolve simple and liberal rating mechanisms with less stringent parameters specifically for MSME looking to their specific constraints and limitations.

In such cases, a good loan servicing track record may be given higher weightage in comparison to financial ratios and as such a more liberal interest rate structure can be made available to the MSME sector, Gadia added. A senior banker said nobody wants to lend to borrowers with ratings below BBB.

”For AA and AAA-rated borrowers, everybody is willing to lend at a lower rate,” the banker said. For short-term loans, differential pricing for a AAA-rated borrower and A-rated borrower has almost become irrelevant because of the surplus liquidity into the system and no demand in the market, the banker added.