Full Form( MSME) Medium, Small and Micro Enterprises
Context: Finance Minister Nirmala Sitharaman announced some details of the Atmanirbhar Bharat Abhiyan economic package for relief to Medium, Small and Micro Enterprises (MSMEs) for dealing with COVID-19 crisis.
Credit Risk route:
- Instead of directly infusing money into the economy or giving it directly to MSMEs in terms of a bailout package, the government has resorted to taking over the credit risk of MSMEs.
- Benefit: It should help the formal banking system meet the credit demand of the MSME sector.
What are credit guarantees?
- Loans to MSMEs are given against property (as collateral) because often there isn’t a robust cash flow study available.
- Low availability of loans during the Corona crisis: Property prices are expected to fall and this inhibits the ability of MSMEs to seek loans. It also means that banks are less willing to extend loans.
- Assurance to banks: It assures the bank that its loan will be repaid by the government in case the MSME falters. For instance, if the government provides say a 100% credit guarantee up to an amount of Rs 1 crore to a firm, it means that a bank can lend Rs 1 crore to that firm; in case the firm fails to pay back, the government will make good all of Rs 1 crore.
- Bad Government finances: This pandemic has meant that government revenues will come under further pressure. For instance, experts are already talking of a GDP contraction of 5% to 10% in the current financial year. That will result in a revenue loss of anywhere between Rs 5 to 7 lakh crore.
- Issue of NPAs:Banks suspect that any new loans will only add to their growing mountain of non-performing assets (NPAs).
- Why the Credit Guarantee method? Banks had the money but were not willing to lend to the credit-starved sections of the economy while the government itself did not have enough money to directly help the economy.
What is the amount of credit guarantee provided to MSMEs? For those MSMEs which were running fine until the Covid-19-induced lockdown, the government has provided a credit guarantee of Rs 3 lakh crore.
- Emergency Credit Line: It is like an emergency credit line and for MSMEs that have an already outstanding loan of Rs 25 crore or those with a turnover less than Rs 100 crore.
- Tenure of loans: The loans will have a tenure of 4 years and they will have a moratorium of 12 months (that is, the payback starts only after 12 months). The loan should be taken before October 31, 2020.
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Why Rs 3 lakh crore?
- Hope for recovery of loan: According to Hetal Gandhi, Director, CRISIL, the total outstanding loan to MSMEs by the banking and NBFC sector would be around Rs 16 to 18 lakh crore. Assuming that 80% of these loans are working capital loans where there would be a 20% incremental funding needs, that gives an amount of approximately Rs 3 lakh crore.
- Need extra money: Since these MSMEs were able to pay back before the crisis, there is no reason why they cannot after the crisis with some extra money.
What are the other measures?
- Subordinate debt scheme: A Rs 20,000 crore scheme which will allow loans to MSMEs that were already categorised as “stressed” or struggling to pay back. In this case, the government’s guarantee is not full, but partial.
- Another measure: The creation of a fund with a corpus of Rs 50,000 crore to infuse equity into “viable” MSMEs, thus helping them to expand and grow. The government intends to put in Rs 10,000 crore and get others like LIC and SBI to fund the remaining amount.
- Change in definition of MSMEs: Now MSMEs will be judged on turnover and there will be no difference between a manufacturing MSME and a services MSME. It will help because “turnover” is the more efficient way to identify an MSME and it also allows a lot of firms, especially in the services sector like mid-sized hospitals, hotels and diagnostic centres to be eligible for benefits as an MSME.
How far will these measures help?
- Dealing with Liquidity problems: They will most likely have a significant impact in helping MSMEs pay salaries and keep their heads above the water even as the economy slows down.
- Reach of scheme: This measure is expected to help as many as 45 lakh MSMEs. These are likely to be the medium and small enterprises, which employ almost 40% of all employees — although these enterprises themselves are very few in number (just about 0.5% of all MSMEs).
Are there any drawbacks to resorting to credit guarantees?
- Moral hazard: Such a guarantee leaves no incentive for either borrower to pay back — he has nothing to lose — or for the lender — the banker is assured of payback from the government so why should he bother to check if the borrower is deserving or not.
- Better option: A more prudent option would have been a split (say an 80%-20%) wherein the government assures to pay back only 80% of the new loan.
This is a welcome move which will increase liquidity for both distressed businesses and cash-starved workers and will provide a boost to the economy. But at the same time, it is quite likely that the government will have to start shelling out money in the next financial year when MSME NPAs rise once the moratorium is over.