Credit and Finance for MSMEs: Federation of Indian Micro and Small & Medium Enterprises (FISME), the MSME industry body, has written to the Finance Minister Nirmala Sitharaman to introduce Surety Bonds to make public procurement more inclusive and help MSEs scale up faster by freeing up their capital, as per a report by the Knowledge and News Network (KNN). 

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A surety bond is essentially a mechanism that provides the government the assurance from surety providers (mostly insurance companies) that the latter would compensate in the event of the vendor failing to oblige the contract.

The industry body said that this move could increase the competitiveness amongst MSMEs. The letter further stated that the introduction of surety bonds will place Indian businesses at par with the most developed economies in an important respect. 

It also highlighted that the credit gap for MSMEs is a critical issue and businesses still face the challenge of proper access to bank facilities. 

For instance, the margin money to be deposited for the issue of a bank guarantee (BG) varies from 10 per cent to 30 per cent for the MSMEs, the report said. Over and above this cash outgo, substantial fees of 2.4 per cent per annum must be paid upfront even if the BG is required to be furnished for five years, it added. 

Besides, FISME also stressed on the issue that many MSEs are unable to leverage the generous 25 per cent purchase preference reserved for them in the central and the state government purchases as per the public procurement guidelines. 

To access banking guarantee facility, requirement of collaterals and payment of margin money – 10 per cent to 30 per cent are some of provisions that have hindered MSMEs from benefiting from the public procurement policy. 

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Till the time of publishing this story, the State Bank of India General Insurance was the only entity amongst all registered with the Insurance Regulatory and Development Authority (IRDA) as potential sureties, that responded to FISME’s request to update on the progress made by them to get the benefit of the opportunity offered to them by the government.