“Govt has guaranteed the banks but will the banks open fund tap to M...

  Jun 12, 2020

“Govt has guaranteed the banks but will the banks open fund tap to MSME sector”? Examine the statement highlighting the key issues and challenges.

  1. The government’s decision to put in place a liquidity infusion package for micro, small and medium enterprises, which entails providing MSMEs whose accounts are standard — collateral-free loan totaling up to Rs 3,00,000 crore, is expected to boost fund flow to lakhs of stressed units in the sector. 
  2. These loans will have a four-year tenure, a 12-month moratorium on principal payments and a cap on interest costs. 
  3. The government has said it will provide a full guarantee to lenders against expected credit losses on these loans. 
  4. MSMEs with outstanding loans up to Rs 25 crore and turnover up to Rs 100 crore can avail these loans up to 20 per cent of their outstanding credit.
  5. MSMEs, which make up for about 45 per cent of the country’s total manufacturing output, 40 per cent of exports, almost 30 per cent of the national GDP are stressed due to depleting internal reserves and low visibility of demand for next six months at least. 
  6. The availability of funds through the banking channel, along with a moratorium on repayment, would help them survive through the economic slump resulting from the lockdown. 
  7. Industry sources said banks will be more than forthcoming to grant these loans to MSMEs since these are fully backed by the government against credit losses. 
  8. The measures for MSME through guarantees, equity infusion and debt support will incentivise bank lending to MSMEs as well as providing crucial support to stressed entities in the current situation.
  9. While MSMEs already running loan accounts with banks may benefit immediately, companies that take loan for the first time may face difficulties.
  10. Banks had already indicated that they are willing to lend to MSMEs and NBFCs, provided the government gives the guarantee. 
  11. However, bankers say more clarity is needed in the case of the proposed Rs 20,000 crores subordinate debt provision available for stressed MSMEs. 
  12. There’s no clarity on whether the RBI will provide this money through its liquidity window or it will be routed through a mechanism like MUDRA which is registered with the RBI as an NBFC or SIDBI. 
  13. Under the MUDRA scheme, loans issued by banks are refinanced by MUDRA. 
  14. Bankers are expecting detailed guidelines from the government and/ or the RBI on the MSME schemes. 
  15. These MSMEs will be offered an equity infusion of Rs 50,000 crore with an initial Rs 10,000 crore from the government. 
  16. Cibil has said loans worth Rs 232,000 crore of MSMEs are at a higher risk of becoming non-performing assets. If some of the loans being given to MSMEs become NPAs, the liability will come to the government through the credit guarantee fund.