Budget 2021 Expectations: ‘Credit scheme must be in line with ECLGS to act as MSMEs’ ‘first-loss’ cover’
Updated: Jan 27, 2021 12:07 PM
Union Budget 2021 Expectations for MSMEs: By aligning the two schemes, the government would be able to incentivise more lending to the sector. The government could bear the cost of the premiums for loans originating in FY21.
The pandemic has been an incredible strain on the MSME sector. It, impacted the earnings from 20 per cent – 50 per cent.
By Shachindra Nath
Union Budget 2021-22 Expectations for MSMEs: Another year, another budget. As the global recovery from the pandemic continues, India’s 2021 budget needs to be mindful of the needs of various sectors affected by Covid-19. MSMEs were particularly hard-hit last year. Finance Minister Nirmala Sitharaman had announced emergency measures for MSMEs in May, including a Rs 50,000-crore equity infusion, the provision of Rs 20,000 crore as subordinate debt, and revising the definition of MSMEs so that manufacturing and service MSMEs will be defined under a common metric. Rescuing MSMEs from the shock of the pandemic needs to be a priority in the New Year, as the sector is an essential cog in the machine of the Indian economy. It employs over 120 million people across the country and is responsible for about 45 per cent of exports.
The government is cognizant of the importance of MSMEs and NBFCs in the economy, as evidenced by the exceptional work with TLTRO, TLTRO 2.0, Partial Credit Guarantee Schemes, and Emergency Credit Line Guarantee Scheme. The upcoming budget is an opportunity to give MSMEs a leg-up in the New Year so that they can rebuild and grow from the crisis of 2020. One can expect certain key measures from the budget this year that will aid in ameliorating liquidity to MSMEs and spurring on their recovery. The crucial challenge in the market that needs to be addressed, is not the availability of credit, but rather the risk appetite for lenders, who are understandably concerned about being saddled with loan defaults.
With that in mind, the best way forward would be for the government to encourage lending. This could be done by bringing the existing Credit Guarantee Scheme in line with the Emergency Credit Line Guarantee Scheme (ECLGS), so it acts as a First Loss cover for MSME financing without any restrictions linked to premiums. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme was launched to supply collateral-free credit to micro and small businesses. The ECLGS scheme, on the other hand, was a lifeline scheme provided to MSMEs to alleviate the stress caused by the pandemic. Through this scheme, the government guaranteed entire funding provided under GECL would be provided with a 100 per cent credit guarantee coverage by NCGTC.
By aligning the two schemes, the government would be able to incentivise more lending to the sector. The government could bear the cost of the premiums for loans originating in FY21. This modification would push lenders to be more generous with MSMEs, while also protecting them from potential risks.
A primary addressable point is to ensure that there is enough liquidity in the system for NBFCs, so that they can support MSMEs. One hopes for a dedicated institutional framework providing a liability to the NBFCs is the need of the hour. This could be in the form of an existing institution or a new one, borrowing basis a sovereign rating, capitalized by and with 100 per cent backing of the government. This institution would provide credit enhancements to the NBFCs in multiple formats. This role has been played to some extent by SIDBI, yet a more focused approach is needed.
A long-term financing institution for NBFCs, with a focus on those that cater to the Priority Sector, similar to how the NHB (National Housing Bank) funds housing finance companies, would be welcome. This would be an essential tool to help tide through major liquidity crises like the one that MSMEs faced last year.
From a more long-term perspective, the purview and balance sheets of domestic development financial institutions like SIDBI (Small Industries Development Bank of India) should be expanded, so that they have the ability to deploy significant amounts of equity capital wherever required. Globally, the DEG in Germany and the Dutch FMO do similar work to supply capital towards specific developmental sectors.
With the introduction of various schemes and systems to democratise credit in India, such as OCEN, account aggregators, and co-lending initiatives, it is reasonable to expect a change in the face of lending in the years to come. These initiatives by the government and the RBI have sought to make capital and procurement more easily accessible to MSME borrowers. There is a high probability that the 2021 Budget will put in place a governance framework to ensure the right oversight. RBI should evolve a framework to be able to regulate the overall financial market, in order to cover broader aspects of lending ecosystems. The existence of such bodies is visible in the mutual funds sector and insurance sector with AMFI and IRDA respectively. However, a loan DSA has no supervising regulator. As there are multiple FinTech players emerging on the scene, it is all the more necessary to have a robust system in place to protect customers’ interests, including rates they are charged, and their data privacy.
The pandemic has been an incredible strain on the MSME sector, their earnings impacted by anywhere from 20 per cent – 50 per cent. The sudden liquidity crunch has been a huge challenge for them to deal with. One hopes that the 2021 Budget will take into account the shocks that the sector has been coping with, and put in place structures to aid in its recovery. The influx of the right amount of liquidity, under the right conditions, will make a huge difference to the growth of MSMEs and will empower them to adapt and digitalise to deal with the rapidly evolving new normal.
Shachindra Nath is the Executive Chairman & Managing Director of U GRO Capital. Views expressed are the author’s own.