The government will offer full guarantee to banks to provide Rs 3 lakh crore as automatic collateral-free loans to micro, small and medium enterprises (MSMEs) whose accounts are still standard, as it intends to bring cash-starved small businesses back from the brink of collapse in the wake of the Covid-19 outbreak. As many as 45 lakh units can resume business activity and safeguard jobs.
Announcing six steps to support the MSMEs, finance minister Nirmala Sitharaman said on Wednesday that the Centre will also facilitate an equity infusion of Rs 50,000 crore into these businesses that are viable and need some handholding. A fund of funds with a corpus of Rs 10,000 crore will be created for this purpose. Similarly, the government will provide a separate scheme for stressed MSMEs, which will benefit 2 lakh of them. It will provide Rs4,000 crore as its share to set up a credit guarantee trust, which will then give its guarantee to the banks. A total subordinated debt of Rs20,000 could be extend under this to such stressed businesses.
While these measures will help ease the liquidity woes of MSMEs, some industry executives say the absence of any fiscal support to tide over the immediate, nagging issues of payment of wages and interest on existing loans comes as a disappointment. Anil Bhardwaj, secretary general of the Federation of Indian Micro & Small and Medium Enterprises, said: “If the government wants MSMEs to take more loans and pay for these when their units remained shut, it will just push them towards a debt trap, from which it will be very difficult to recover.”
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As for the collateral-free loans, the government will provide emergency credit line to MSMEs from banks and NBFCs up to 20% of their entire outstanding credit as of February 29. Borrowers with up to Rs 25 crore outstanding and Rs 100 crore annual turnover will be eligible. Such loans will have a 4-year tenor with moratorium of 12 months on the repayment of the principal amount. The interest will be capped and the scheme can be availed until October 31.
Neverheless, the guarantee scheme will provide a much needed push to credit disbursement to the MSMEs.
“However, the risk of credit culture deteriorating will remain a monitorable, as bankers would have no skin in the game and hence adhoc disbursement may increase risk. No immediate outgo is expected by the government,” Crisil Reearch said. “Gross bad loans in the MSME segment in FY21 may be lower than earlier anticipated but will run a risk of rising post moratoriums. Rs 20,000 crore for stressed MSMEs is also a step in right direction given that GNPAs are already on a rise. Rs 50,000 crore equity fund may not have any meaningful impact and is a far-fetched scheme.”
Sharad Kumar Saraf, President, president of the exporters’ body FIEO, said the package provided a booster dose for businesses, especially MSMEs, that are facing the brunt with major disruptions in supply-chains. Ravi Sehgal, chairman of the engineering goods exporters’ body EEPC India, said measures like support to the e-market linkages for MSMEs to be promoted as a replacement for trade fairs and exhibitions is a well-thought relief to the exporters.
In a recent report, Kotak Institutional Equities said only 7% of SMEs surveyed thought they would be able to survive for more than three months if their business remained closed. While about 97% of the firms surveyed have paid their employees salary for March, as many as 34% of the SMEs say they won’t be able to pay pay April and May salaries (in the absence of government intervention).
As such, more than a half of the SMEs reported a year-on-year decline in revenue in FY20, the Kotak report says, with more than 30% having reported revenue drop of more than 10%. This clearly shows the SMEs, which were already in deep trouble, saw their fortune plummet further after the Pandemic hit they hard.