As most small businesses remain on the brink of collapse due to the Covid-19 crisis, raising the spectre of unprecedented job losses, the government is considering a raft of relief measures, including setting up a Rs one lakh crore fund to expedite clearances of dues owed to MSMEs, guarantee on the enhanced limit of loans (up to 20%) and a mechanism to help them pay salaries to their employees.

Some of these proposals were discussed at a review meeting of the MSME sector, chaired by Prime Minister Narendra Modi last week, sources told FE. While the total amount of fiscal intervention for MSMEs still remains unclear, industry executives believe it could be worth Rs 2-3 lakh crore, including the guaranteed loan amount. The relief for MSMEs would be part of the next stimulus package that the government has been working on to prop up a battered economy.

In an interview to CNBC-TV18 on Monday, MSME and transport minister Nitin Gadkari said the proposal to grant official guarantee on the enhanced limit of working capital loans is being approved to increase credit flow and ease liquidity problems of small businesses. The Centre is also firming up a mechanism to facilitate the clearance of dues owed by various PSUs, central and state government departments and even private industries to MSMEs within one month. The minister refrained from specifying the dues amount but conceded that it remained “substantial”. However, in March, Gadkari had said government and private undertakings owed MSMEs almost Rs six lakh crore.

Gadkari has also asked labour minister Santosh Gangwar to utilise the Rs 80,000 crore lying with the Employees State Insurance Corp (ESIC) to address the crisis faced by the MSMEs amid mounting pressure on them to pay April salaries. This proposal, too, would require approval of the finance ministry and the Prime Minister’s Office (PMO). Wage payment to workers remains the most immediate and biggest concern among various cash-strapped MSMEs, especially when factories are shut, sales disrupted and most of the orders cancelled.

As for the fund to help clear MSME dues, the government is expected to pay the premium to insure this fund. It will also devise a formula for sharing the interest burden on loans to be made available from this fund to various entities for clearing their dues to MSMEs swiftly, sources said. The proposal will be sent to the Cabinet for clearance after the finance ministry gives its clearance.

The MSME ministry has also suggested the creation of a Rs 10,000-crore fund to buy up to 15% equity in crisis-hit, but otherwise well-rated, MSMEs that will list on bourses. The ministry has submitted this plan with the finance ministry.

Having exhausted cash reserves in paying the March salary to employees, MSMEs are unsure if they will be able to pay any longer without assistance. Liquidity may be in abundance but credit flow to most small and medium businesses, which are in greater need of loans than the large ones, still remains inadequate, in the absence of regulatory forbearance on bad loans or official guarantee on advances.

While the central bank had allowed a three-month moratorium on loan repayment, MSME bodies have asked the government to help extend the moratorium to 6-9 months. Of course, the loan restructuring window for MSMEs is open until December, even this facility may have to be extended if the crisis stretches longer, they have said.

In a report released last week, 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 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 them hard.