Opening up opportunities for startups and small and medium enterprises (SMEs), PM Narendra Modi on Saturday announced some steps benefiting the section that doubled the credit guarantee on loans and sought to enhance the cash credit limits is expected to increase the banking sector fund flows to the SME sector. These would also lower borrowing costs of the SMEs. According to Indian Express, Bhuwan Goyal, director at A.P. Refinery, a Punjab-based edible oils refiner operating in the SME sector said, “These decisions will ensure that additional deposits mobilised by the banks during demonetisation period are not directed only at lending towards large industries. SMEs will get better access to credit with doubling of the guarantee.”
The government wants that the additional deposits mobilised through withdrawal of old notes of Rs 500 and Rs 1,000, should be used to enhance credit to SME sector, a senior banker at a Delhi-based PSU bank said. He was quoted as saying, “Basically now we can finance loans to projects worth double the earlier costs as the guarantee will be there.”
Government and SIDBI run – Credit Guarantee Fund Trust for Micro and Small Enterprises, which provides a guarantee up to 85% of the sanctioned loan facility for a fee, availed by such enterprises.This guarantee enables both existing and new SMEs to get collateral-free loans at lower rates.
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Under the scheme, the credit from non-banking finance companies will also be covered. As on May 31, 2016, a total of 24.31 lakh proposals from micro and small enterprises have been approved for guarantee cover for aggregate credit of Rs 1.13 lakh crore.
According to industry chamber FICCI, “Enhancing the limit from Rs 1 crore to Rs 2 crore for credit guarantee and increasing the cash credit limit from 20 per cent to 25 per cent will help them in their working capital requirements and keep the trade moving at a time when remonetisation process is still ongoing.” Telling about the initiative, PM Modi in his address to the nation said that the Government of India underwrites loans given by banks to small businesses through a trust. And so far, loans were covered up to Rs 1 crore, now this limit is being enhanced to Rs 2 crore. Also, the scheme only covered bank loans earlier, now onwards, it will cover loans given by NBFCs as well. “Banks and NBFCs will not levy high interest on these loans, as Government of India is bearing the cost of underwriting them,” Modi said.