COVID-19: Govt. Offers MSMEs credit guarantees and equity support

KOLKATA: On Wednesday, PM Narendra Modi, in a national televised address, unveiled a comprehensive economic stimulus worth ₹20 Lakh Crore to boost the Indian economy. On cue, Finance Minister, Nirmala Sitharaman also unveiled the long-awaited economic relief measures for the cash-strapped Micro, Small and Medium Enterprises. These measures also intend to give relief to the salaried class, under the Atma Nirbhar Bharat Abhiyan relief package.

FM Sitharaman outlined the measures for India’s largest employing sector with 111 million employees, by announcing the rescue package that includes credit guarantees, equity support and a better chance to win government contracts. She hopes that this package can help MSMEs navigate through the unprecedented challenges due to the COVID-19 crisis like loss of business, flight of workers and a severe liquidity crunch. Plus, helping them restart is key to addressing the pain of job losses across the country alongside a probable restoration of consumer demand.

Additionally, FM Sitharaman also announced the upward expansion of the definition of MSMEs to include higher investment limit and an additional norm based on revenue. The previous defition classified an MSME based on self-declared investment in plant and machinery. For instance, in case of MSM manufacturing and service enterprises, the investment limit will be increased to 1 Crore while the revenue limit will be up to 5 Crore. Till now, for micro manufacturing enterprises, the investment limit was 25 Lakh and 10 Lakh for the service sector. The new definition will not distinguish between manufacturing and service sectors of the industry.

The intent behind this decision is to remove the perverse incentive for MSME businesses to stay small as firms with MSME classification can enjoy the benefits that larger-scale businesses don’t. This new definition also ensure that they will be immune from inspectional scrutiny even if they grow.

Countries like the United States of America (USA), United Kingdom (UK) and Japan had announced their packages upfront, a long time before India did. All of them had a combination of cash transfers, credit guarantees and liquidity enhancement built in their stimulus.

FM Sitharaman’s plans for Indian MSMEs happen to be focused only on the latter two aforementioned aspects. No assurance of direct wage payments were made in this plan. Experts say that is highly unlikely and these measures are also unlikely to make any real economic impact this fiscal. But they added that everything that the MSME sector has been asking for, was included in the package, except for direct wage distribution.

MSMEs usually have little collateral to offer against bank credit. So, for non-defaulting small businesses with outstanding debt of as much as 25 Crore and sales of up to 100 Crore, Sitharaman offered extra working capital finance of up to 20% of their valuation. “The(se) units will not have to provide any guarantee or collateral of their own. The amount will be 100% guaranteed by the government of India providing a total liquidity of 3 Lakh Crore to more than 4.5 million MSMEs,” said the minister. “This scheme will be available till October 31,” she added.

These loans will have fixed four-year tenure, will have concessional interest rates, with a one-year principal repayment moratorium and will be given automatically without any collateral. Both the principal and interest will be guaranteed by the government as banks seem to be risk-averse by not lending to cash-strapped businesses. This is evident by the excess ₹8 Lakh Crore that the banking sector has parked in RBI reserves which is currently netting them a lower 3.75% interest during this crisis.

Under the plan to support MSMEs, the FM also announced a credit provision for shareholders of MSMEs that are under financial stress due to the lockdown. The owners of up to 15% stocks in such firms will be offered this credit line, under partial guarantee so that they can infuse finances into their respective businesses, to thrust them out of their hardships. FM stated that this credit will be limited to ₹75 Lakhs per individual.

The government has also announced equity funding support to small businesses via a corpus worth ₹10,000 Crore which will help raise more funds to finance equity infusion of about 50,000 Crore into MSMEs. However, the details of creation of this fund and the methodology behind choosing the investee companies has not been shared, as of yet.

Additionally, the government is putting a suspension on employer as well as employee contributions to the Employee Provident Fund (EPF) for eligible private-sector businesses by 3 more months than before. Employees, not covered in this programme, so far, are set to see 4% higher in-hand salary as both employer and employee contributions have been reduced from 12% to 10%. But government employees’ contributions have stayed the same at 10%.

The government essentially unveiled a set of 15 measures for various stressed market sectors of the Indian economy, under the relief package. Six of these measures were meant to benefit MSMEs in one way of other. FM Sitharama explained these decisions, at a press conference in the nation’s capital, by saying, “Essentially, this is to spur growth and to build a very self-reliant India.” However, she also clarified by saying that the intent behind these measures are to slowly open up the economy, not to make it “isolationist”.

FM Sitharaman unveiled other plans some of which were aimed at supporting the non-banking finance sector. She specified that non-banking financial companies (NBFCs), housing finance companies (HFCs) and microfinance institutions (MFIs) will be supported through a 30,000 Crore liquidity scheme and a partial credit guarantee scheme worth 45,000 Crore.

Under the liquidity scheme, banks will be allowed to invest, through primary or secondary market transactions, in investment-grade debt papers issued by NBFCs, HFCs and MFIs. These will be fully guaranteed by the government.

Moreover, the partial credit guarantee scheme which already let PSBs purchase high-rated pooled assets from financially sound NBFCs and HFCs will now cover PSBs/CPs with ratings of AA and below, including unrated papers. So, these measures to support non-bank lenders can indirectly benefit small businesses as MSMEs generally seek loans from them.

In another measure, Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) were also directed to provide relief worth ₹90,000 Crore to electricity distribution companies. The government will also be asking states to extend the registration and completion dates of real estate projects suo moto by six months and advise them to treat COVID-19 as a ‘force majeure’ under the Real Estate Regulatory Authority Act.

FM Sitharaman also announced tax concessions and liquidity support for several other market sectors as part of the government’s economic relief package named Atma Nirbhar Bharat Abhiyan. She also talked about JAM trinity solution—Jan Dhan Yojana, Aadhaar and mobile numbers—as a game-changing reform for better targeting of subsidies.



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