Credit and Finance for MSMEs: While various stakeholders have appreciated the bold move to set up a fund of funds, it will stress test the government’s preparedness and resolve to handle such a significant task.
- By Rudresh Singh
Credit and Finance for MSMEs: The Ministry of Finance, Government of India has indicated that government banks have sanctioned Rs 3,200 crore through the Rs 3-lakh crore Emergency Credit Line Guarantee Scheme for the MSME sector. MSMEs in more than 3,000 tier-II towns were covered in one day (1 June 2020) under the scheme which will enable them to pay salaries, rent, and restocking expenses. Under the scheme, 100 per cent guarantee coverage will be provided by National Credit Guarantee Trustee Company (NCGTC) for additional funding of up to Rs 3 lakh crore to eligible MSMEs and interested MUDRA borrowers, in the form of a guaranteed emergency credit line (GECL) facility. The Union Cabinet has also proposed for provisioning of Rs 20,000 crore as subordinate debt to provide equity support to stressed MSMEs proposed equity infusion of Rs 50,000 crore for MSMEs through a fund of funds (the 2nd Package).
While these measures are laudatory and very timely, the industry is treading cautiously. As on date, there is a significant lack of clarity with respect to the ECLGS scheme. There are multiple incidents of MSME manufacturers and service providers who are met with hostility when inquiries are raised with government bankers. Bankers currently indicate no credit will be disbursed given lack of clarity or guidelines from the Reserve Bank of India or the government.
It is time that the central government steps in and handholds banks to ensure that the scheme is properly implemented till the last mile. Perhaps a nodal agency run and managed by government bankers ought to be set up so that they understand and address on-ground issues immediately. The CHAMPIONS (Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength) Portal, a unified, empowered, robust, bundled and technology-driven platform for helping and promoting MSMEs, is an exemplary step in that direction.
It is estimated that there are about 7 crores MSMEs in India. This number is likely to go up significantly with the recently expanded definition of MSMEs. It is also estimated that one in three or one in four MSMEs is in the need of financial support. It appears that the immediate support was probably not sufficient and therefore the Cabinet Committee on Economic Affairs headed by the Prime Minister has guaranteed additional support by way of the second package.
The second package, which consists of provisioning of Rs 20,000 cores as subordinate debt to provide equity support to stressed MSMEs, is a welcome step. Stressed MSMEs and those which may be classified as non-performing assets will be eligible for this scheme. Similarly, the Central Government will set up a Rs 10,000 crore fund, which, with leverage, will be able to finance equity infusion of about Rs 50,000 crores in small businesses. The move is expected to expand the size as well as the capacity of MSMEs and will encourage them to get listed.
The expectations from the government are mounting. While various stakeholders have appreciated this bold move to set up this fund of funds, it will stress test the government’s preparedness and resolve to handle such a significant task.
The government had announced a similar fund for start-ups as part of the Start-up India Action Plan in 2016. “A corpus of Rs 10,000 crore could potentially be the nucleus for catalysing Rs 60,000 crore of equity investment and twice as much debt investment,” the government had said at the time. “This would provide a stable and predictable source of funding for start-up enterprises and thereby facilitate large-scale job creation.”
That fund has raised a corpus of Rs 25,728 crore, according to a government press release from March 11, 2020. But, in five years, Alternate Investment Funds (AIF) have invested just Rs 3,582 crore into 338 startups. Of this, Rs 912.9 crore–25 per cent of the total investment till date and 9 per cent of the Rs 10,000 crore committed in 2016–was from the government’s Fund of Funds, according to information from the website of the Small Industries Development Bank of India (SIDBI). The Fund of Funds is managed by SIDBI, which invests the money into Alternate Investment Funds, which in turn invest in start-ups.
The government’s previous attempts with the implementation of a fund of funds hasn’t met much success. As part of its Startup India Action Plan 2016, the Central Government had set up a Rs 10,000 crore fund of funds within SIDBI. This fund raised a corpus of over Rs 25,000 crores but has managed to invest less than Rs 4000 crores in startups. The industry is hopeful that this experience will only help the Central Government in better handing this fund of funds this time around and that a task force will oversee the actual implementation and address issues faced by Industry.
The Central Government has shown exceptional resolve in taking these immediate first steps but the results of their success will only be witnessed if the government machinery stands up to ensure proper on-ground implementation and seamless timely execution.
Rudresh Singh is the partner at L&L Partners. Views expressed are the author’s own.