Rs 3 Lakhs Crore Emergency Credit Line Scheme for MSMEs

After two extensions to the COVID 19 lockdown in India, the Union Finance Minister Nirmala Sitharaman announced a special economic package of 20 lakh crores in a statement made on the 14th of May. It was the second in a line of measures by the Union Government and the Reserve Bank of India to stimulate the Indian economy in the wake of repeated extensions to the lockdown.  The  package – titled as the ‘Atma Nirbhar Bharat Abhiyan’ or ‘Self Reliant India Movement’-  represents approximately 10% of the nation’s GDP.

It is intended to provide relief for businesses and workers through the infusion of credit and the provision of tax breaks allowing enterprises to function in anticipation of the incoming recession caused by the global health crisis, while also promoting self reliance. The main features of this second phase of the Atma Nirbhar Bharat Abhiyan  include:

• 3 lakh crore emergency credit guarantee schemefor MSMEs.
• Subordinate debt provision of Rs. 20,000 crores for stressed MSME
• 50,000 crore equity infusion fund for MSMEs as well as a redefinition of the term based on turnover.
• Disallowing global tender enquiries for procuring goods and services less than Rs. 200 crores.
• EPF support for businesses and workers.
• A special liquidity scheme of Rs. 30,000 crores as well as a partial credit guarantee schemeof Rs. 45,000 for NBFCs, HFCs and MFIs.
• 90,000 crore liquidity injection for DISCOM.
• Extensions relieving  contractual obligations for contractors and real estate projects.
• Tax reliefs to businesses and on TDS.

Breaking down the Rs. 3 Lakh Crore Emergency  Credit Line Scheme For MSMEs:

The credit line scheme provides working capital financing for MSMEs for upto 20% of their outstanding credit as of February 29, 2020. In doing so, it will allow  functioning MSMEs – whose operations have been disrupted by COVID 19 – to continue operations and the payment of salaries to employees as the nation heads towards a major slowdown.

A total of Rs. 3 lakh crores have been allocated for this  and are to be provided in the form of term loans with concessional interest rates for around 45 lakh MSMEs within the country.  The Union Government arrived at this amount by estimating the outstanding loans to such enterprises at the time, which totalled to approximately Rs. 16-18 lakh crores. After assuming that 80% of these were working capital loans with a 20% incremental funding requirement, these funds were allocated to allow these enterprises to borrow enough to maintain operations.

Interestingly, these enterprises will not be required to provide collateral to secure such loans, while the government will provide a 100% credit guarantee to the concerned financial institution. Additionally, these loans will also only be provided to enterprises with an outstanding credit of upto Rs. 25 crore and a turnover lower than Rs. 100 crore. The loans are to have a tenure of 4 years with a moratorium of 12 months, such that repayment begins after this period in order to allow MSMEs to recover.

This measure is estimated to help nearly 45 lakh MSMEs in the country that employ close to 40% of India’s workforce.  The changes to the definition of an MSME  with respect to turnover being the criteria for classification, will also aid service sector organizations such as mid sized, hotels, hospitals and diagnostic centres to avail these loans to stay afloat.

There was a pressing need for such a step by the government. Due to the uncertain economic climate prevailing during the COVID 19 crisis, banks will become reluctant to lend money; an attitude only bolstered by the growing list of NPAs (Non Performing Assets) in the wake of the crisis. By ensuring  that the government takes on the repayment of loans for enterprises at risk of defaulting  and by infusing working capital into MSMEs, the credit guarantee scheme will help to offset some of the economic repercussions of the current pandemic.

Conclusion :
However, while the announcement is a welcome move, it does come with a flaw  in that the 100% credit guarantee scheme provides no incentives for enterprises to pay back loans. The banks and other financial institutions also do not take on any risk as full repayment of these loans by the government is ensured in the case of defaulters. It is could be the case that the government will have to spend significant amounts on resulting NPAs in the coming years.

The Atma Nirbhar Bharat Abhiyan also provides for a subordinate debt fund of Rs. 20,000 crores for struggling MSMEs and a Rs. 50,000 crore infusion of equity into viable enterprises to stimulate their growth, in addition to the credit guarantee scheme. It remains to be seen how effective these measures will be as the national and global economic ramifications of the COVID 19 crisis are yet to be ascertained fully.