MSMEs: for MSMEs, finance minister’s 3 lakhs crore credit guarantee may not lead to assured benefits

For millions of small businesses across the country, credit guarantees for unsecured loans may not be enough to survive the global pandemic crisis.

On Wednesday, Finance Minister Nirmala Sitharaman presented a series of measures for MSMEs, including the establishment of an unsecured automatic loan provision worth Rs 3-lakh crore. To provide struggling MSMEs with equity support, the government will also facilitate the provision of Rs. 20,000 crore as subordinated debt and an equity injection of Rs 50,000 crore for MSMEs through the Fund of Funds. . The government also took the opportunity to change the definition of MSMEs in the country.

The metrics may seem like huge in numbers, but many are skeptical if it can translate into significant gains. However, before we get into what worries small businesses, there are a few bright spots in the announcements.

The positive points

According to Ashwini Anand, founder and CEO of Monsoon Creditech, the announcement solves the problem of lack of credit to a reasonable extent. “To put the Rs 3 lakh crore figure into context, it is interesting to note that at the end of fiscal 2019, banks and NBFCs had around Rs 17.4 lakh crore in circulation for MSMEs. , this sum of Rs 3 lakh crore is about 17% of the total outstanding loans to MSMEs, which is not a small number. ”

Anand adds that it’s also worth noting that since the government appears to be guaranteeing these loans and not actually lending this money from its own books, the impact on the budget deficit will not be as severe as the highest number. suggests. “NPAs on loans to MSMEs have historically exceeded 10% at the aggregate level. For example, according to TransUnion, the June 19 NPA rates for MSMEs (at pan-Indian level) were 16.1% for loans disbursed by PSU banks, 3.8% private. banks and 5.4% for NBFCs.

According to the Economic Survey, despite a decline in key rates, credit growth in the economy has been declining since the start of 2019. Bank credit growth (year-on-year) fell from 12.9% in April 2019 at 7.1% as of December 20. , 2019. The main contributor to this slowdown has been negative growth in credit to Micro, Small and Medium Enterprises and Textiles. The government has tried to solve this problem by providing secured unsecured loans.

According to Sanjay Doshi, Leader – Financial Services Advisory, KPMG in India, the biggest challenge that banks face in providing additional products is the basis of underwriting as standards and historical information on profitability, stock levels. , working capital levels, etc. extended cannot be invoked.

“In the new reality, banks are faced with a dilemma of how to assess a borrower and the risks they should take on. The automatic unsecured loan under the 100% credit guarantee program should bring relief to MSMEs, ”Doshi said.

Source – Economic Survey of India

The other side of the coin

To understand what is at stake, it is important to understand the importance of the MSME sector. The MSME sector contributes significantly to the growth of the Indian economy with an extensive network of around 6.3 million units and a share of around 30% of nominal GDP in 2016-17. The sector’s share in total manufacturing output was even higher, at 45 percent.

What appears to be the biggest failure of the ad is that there isn’t much to stimulate demand and offering more or less debt may not be the answer. to address liquidity challenges for MSMEs.

“The package announced today left MSMEs deeply disappointed. MSMEs were demanding immediate financial support to pay salaries and interest on loans during the lockdown period. Instead, the government offered a loan program. Without collateral The program involves little expenditure for the government – this will only help to create a credit guarantee fund, which will improve the comfort level of bankers to lend. Good, but not enough for MSMEs . There are several other initiatives that would be useful to varying degrees to MSMEs such as Rs 20,000 crore, coordinated debt sub-funds, and funds of funds, etc. ”said Anil Bhardwaj, general secretary of the Federation of Micro and Small and Indian medium-sized enterprises (FISME)

Jayanth Mutha, director of Himlite Products, said that while the intention was good, the shares were half-baked. “Regarding short-term measures, there has been a loss of sales so far. Expenses, salaries and rent have to be paid. So I take a loan and I pay. But they don’t. nothing said about the interest rate which I assume will not be low. So even if I can take out a loan and resolve my liquidity problem immediately, I will be burdened with having another loan to repay. don’t want to be an NPA. More clarity of thought should have come when announcing such measures, “Mutha said.


The unorganized sector can be excluded from the scheme.

Unsecured loans are not a new phenomenon and were also announced earlier. they consider it an “unprofitable business idea”. “So unless an MSME is looking to expand its business or has a financially rewarding business plan, our banks are not showing much interest in funding them,” says Agarwal.

The Reserve Bank of India has tried for years to get banks to lend to MSMEs, but with little success. Bank loans to MSMEs are eligible for the classification of priority sector loans. The RBI had also recently announced that additional loans to MSMEs would be exempt from CRR from the fortnight ending January 31, 2020 until the fortnight ending July 31, 2020. However, bank lending to the sector has not resumed, most of the lenders having turned. averse to risk, choosing to park his money with the RBI instead of lending it to small businesses.

The biggest worry for MSMEs is that even if they manage to get a loan from a bank, in the absence of real demand, they can fall into the debt trap. “The FM did not say anything about reviving demand. In order for all businesses to stand on their own, they would ultimately need a boost in sales and demand. The chain of stimulating demand must be set in motion for these small and medium-sized units to survive in the Moreover, there was no mention of the work. When there is no one to run the factories, what can you really do, ”asks Mutha.

According to Doshi, the program appears to be aimed at existing borrowers with outstanding credit. “The operation of the program for ‘new to credit’ MSMEs needs more clarity. The effectiveness of the announced political measure lies in the effectiveness of its implementation. We have to wait for the details of the implementation steps, ”Doshi said.

Speaking on similar lines, Mahavir Pratap Sharma, outgoing CEPC president, says the fine print is what to see. “It will be good if the loan amount of Rs 3 lakh can be distributed among micro, small and medium enterprises. Also, I still don’t know how they will take into account the unorganized sector which does not file returns and “Neither do I have a track record. I hope the money will flow to them too,” Sharma says.

(With contributions from Neha Dewan and Shariq Khan)

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