A Much-Needed Boost for MSMEs: Government’s All-New Economic Relief Package

Government of India announced a relief package to help the struggling MSME sector in India, the worst affected in the COVID crisis. In this blog we will understand the implications of the relief package.

The Micro Small and Medium Enterprises (MSME) sector in India is the world’s second largest in terms of revenue generated and the number of people employed. The entire sector came to a standstill when the Covid-19 pandemic arrived, followed by the nationwide lockdown. Several people including migrant workers lost their jobs.

An economic package was urgently needed to revive the sector. The Atmanirbhar Bharat Abhiyan economic package, announced by the Finance Minister, Nirmala Sitharaman, is a much-needed relief for MSMEs. The package offers a massive increase in credit guarantees. Some of the key measures declared include Rs.20,000 crore subordinate debt, revised definitions of MSMEs, and Rs.3 lakh crore collateral-free automatic loans.


What is a credit guarantee and how will it help the MSMEs?

Banks and other lenders offer loans to MSMEs against a property because of an absence of cash flow analysis. During a crisis, property prices drop, hindering MSMEs’ ability to obtain loans as banks are less inclined to offer loans.

With the central government’s credit guarantee, banks are assured of their loans being repaid by the government even if the MSME fails. In layman’s terms, if the government offers, say a 100% credit guarantee up to Rs.10 crore to a company, it implies that a bank can contribute Rs.10 crore to that company, and if the company fails to repay, the government will pay the entire money to the bank.

The effort to inject liquidity into the economy through banks has not been a huge success, as they do not wish to lend any money during these uncertain times. Banks, quite rightly, believe that new loans will only compound their rising Non-Performing Assets (NPAs). With this credit guarantee scheme, the government has tackled the problem of banks’ unwillingness to lend to MSMEs.


How is this government intervention helping tackle the bad-debt problem?

MSMEs have been struggling to grow for over a decade due to policy decisions such as a tricky GST implementation, demonetization, and red tape among other issues. All this while they have mostly been dependent on new loans to cope with these crises. However, the arrival of the pandemic has led to a complete collapse.

Under such circumstances, government intervention was unavoidable. The 3 lakh crore worth of collateral announced by the finance minister that includes free loans for MSMEs in a bid to plug the funding gap will go a long way in the sector’s revival. While this economic package is not a universal remedy for all MSME problems, it will help them keep afloat for the time being.


Emergency Credit Line Offered to MSMEs

The emergency credit line of 3 lakh crore is for MSMEs with an outstanding loan of Rs.25 crore or a turnover of below Rs.100 crore. The tenure for these loans will be 4 years with a moratorium of 12 months and must be taken before October 31, 2020.

The government is hopeful that this emergency credit line will aid those MSMEs to apply for another loan and mend their condition. The expectation is that since these MSMEs were able to repay before Covid-19 hit the economy, there is no reason why they cannot after the pandemic fades, given they are offered some extra money to endure this period.


What are the benefits and implications of the economic package?

The benefits and implications of this bailout package are described in the following points:

1.  Aatmanirbhar Bharat, protection from foreign firms: This will ensure that the MSMEs do not have to deal with unjust competition from foreign companies.
2. The 12-month moratorium will help MSMEs conduct business without being concerned about EMIs for a year.
3. The government will clear all dues owed to MSME suppliers in 45 days, thereby injecting much-needed liquidity.
4. There is a provision of subordinate debt for MSMEs that have been declared NPAs by financial institutions.
5. With exhibitions and markets expected to remain closed, the government will offer MSMEs e-market linkages.
6. The government has decided to change the classification of MSMEs by tying them to turnover instead of an investment.
7. Infusing more equity in the MSME sector through a corpus of Fund of Funds.

This economic bailout package may have fallen short of giving immediate relief to MSMEs, but it does deliver on the promise of offering them a recovering ground to stay in business.



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