Stimulus ‘inadequate’, 25% of MSME loans may default: Panel

Source: Indian Express

Relevance: A legislative group assessed the stimulus package for MSMEs by the Central government.

Synopsis: Concerned about the dire state of small businesses, the committee advised that the government announce a “bigger economic package aimed at increasing demand, investment, exports, and job creation to help the economy, particularly MSMEs.”


The stimulus package provided by the Central government is “inadequate,” according to a legislative group assessing the impact of Covid-19 on MSMEs. The measures were more of loan offerings and long-term, rather than improving cash flow to generate demand as a quick relief.

The Department-related Parliamentary Standing Committee on Industry has advocated for soft loans to MSMEs at a low interest rate of 3-4 percent, liquidity assistance for small businesses, and the establishment of a National Electronic Employment Exchange, as well as a new employment policy.

What did the RBI committee found out and suggested after the impact of the pandemic on MSMEs?

According to the study, “it is predicted that over 25% of MSME loans may fail because some MSMEs are having difficulty obtaining working capital from banks,” the chambers told the Committee.

  • Firstly, the committee, chaired by a Rajya Sabha MP, recommended that the Reserve Bank of India ease non-performing asset (NPA) classification rules for MSMEs and align them with the payment cycle. 
    • The RBI’s 90-day limit for classifying MSMEs’ overdue should be increased to 180 days so that MSMEs are not forced to shift their working capital to servicing loan-instalments and clearing debts at the expense of normal business operations.
    • This adjustment in RBI criteria will save a substantial number of MSMEs from going bankrupt or closing down. The MSME sector accounts for over 30% of the country’s production and nearly half of its exports.
  • Secondly, no comprehensive research has been done by the Ministry of MSME to determine the actual losses experienced by the MSME sector due to the government’s statewide lockdown.
  • Thirdly, in addition to subsidised soft loans for MSMEs, the panel advised that traders and retailers be included in the Emergency Credit Line Guarantee Plan (ECLGS) and that the existing subordinated debt scheme is restructured. 
  • Lastly, the group offered suggestions for promoting domestic production and reducing import dependency. The availability of soft loans to MSMEs at a low-interest rate with a long repayment term, easier land acquisition, and fewer compliance requirements, could aid in the development of import substitution in the country.
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