The Government of India has announced the first set of stimulus package for the poor amounting to Rs. 1.7 Lakh Crore (0.7% of GDP). Later, on May 14, 2020, the Government announced a five tranche stimulus package by the name Atmanirbhar Bharat. The package focuses on sectors like Micro, Small & Medium Enterprises (MSMEs), Non Banking Financial Companies (NBFCs), agriculture, power sector, migrants and state government borrowings.
Out of 15 measures announced in Tranche 1, six were for the MSME sector. The Finance Minister, Nirmala Sitaraman, announced the measures to boost liquidity to MSMEs, help them take benefit of the government schemes, enable them to compete with foreign companies, and strengthen their network. The five tranches together amounted to Rs. 20.97 Lakh Crore.
Package for MSME sector: Why is it important?
MSME segment constitutes 8% of India’s GDP. It contributes 50% to our exports and almost 45% to overall employment. Ever since demonetization, this sector has been facing liquidity crisis. This has been accelerated by the demand slowdown which hit us since 2019, now made worse by COVID-19. The transition to Goods and Services Tax (GST) and the resulting complications also took a toll on their finances. Meanwhile, banks also were shy of lending to them due to fear of NPAs. All these factors meant a fiscal package for the MSME segment was necessary.
Salient features of the package are:
1) Collateral free loans worth Rs. 3 Lakh Crore:
Under this scheme, Government of India has offered to guarantee loans given by banks and NBFCs to MSME units up to Rs. 3 Lakh Crore, if they are without any collateral. The guarantee would cover both principal and interest. The lenders were asked to lend 20% of the outstanding credit to MSMEs as on February 29, 2020 which incidentally comes to almost Rs. 3 Lakh Crore itself.
How the guarantee scheme works?
Other features:
- a. MSMEs with up to Rs. 25 Crore outstanding credit and up to Rs. 100 Crore turnover are eligible.
- b. The tenure will be for four years and there will be a moratorium (deferral) of 12 months for principal & interest.
- c. The scheme is in force until October 31, 2020.
The guarantee component is expected to ensure that banks and NBFCs do not shy away from lending to MSMEs as repayments are guaranteed by the Government even if the unit defaults. However, for the scheme to succeed, government should make good the loss to the lenders without any conditions and without delay.
2) Subordinated debt worth Rs.20,000 Crore:
MSMEs declared as non-performing or those which are stressed will be provided Rs 20,000 crore subordinated debt. Out of this, the government will also provide Rs 4,000 crore to CGTMSE (Credit Guarantee Fund Trust for Micro & Small Enterprises) that in turn will offer partial credit guarantee support to banks for lending to MSMEs.
CGTMSE is a Trust launched by the Ministry of Micro, Small and Medium Enterprises, Government of India, and the Small Industries Development Bank of India (SIDBI). The primary objective of the scheme is to give credit guarantee to financial institutions that provide loans to MSMEs. It aims to encourage entrepreneurs to take collateral-free loans for starting businesses without the fear of defaulting. The Trust fund will reimburse the lending institution up to a certain limit, in case the borrower defaults.
During FY 20, Rs. 45,000 Crore were disbursed to MSMEs under collateral-free loans and units who are likely to face increased risk aversion from banks would benefit from the Rs. 20,000 Crore subordinate loans.
3) Equity infusion of Rs.50,000 Crore:
The Government will infuse Rs 50,000 Crore equity in MSMEs through a Fund of Funds (a fund controlling other funds). The structure will have a parent fund that controls a few subsidiary funds. The Fund of Funds will be set up with an initial corpus of Rs 10,000 Crore which will be leveraged to give equity support worth Rs.50,000 Crore to MSMEs having growth potential and viability. It will also urge MSMEs to list on stock exchanges.
The equity infusion by the Government will help these units to secure funds form financial institutions, who are otherwise risk averse to lend to them, at much better terms.
4) Revised definition of MSMEs:
This has been done to address MSME’s fear of outgrowing in size to receive benefits given by the government as per the current definition.
The existing definition is as below:
[A] Investment-based definition of MSME manufacturing enterprises: Manufacturing enterprises investing between Rs.1 Lakh – Rs. 25 Lakh, Rs.25 Lakh – Rs. 5 Crore, and between Rs. 5 Crore-Rs. 10 Crore in plant and machinery or equipment were till now defined as Micro, Small and Medium enterprises respectively.
[B] Investment-based definition of MSME service enterprises: For services businesses, the investment threshold limit till now was up to Rs 10 Lakh, Rs.10 Lakh – Rs. 2 Crore, and between Rs. 2 Crore to Rs. 5 Crore for Micro, Small and Medium enterprises respectively.
The new definition common for both manufacturing & service enterprises is as below:
[a] Investment in plant & machinery of less than Rs. 1 Crore and turnover up to Rs. 5 Crore will be defined as Micro-units.
[b] Investment in plant & machinery between Rs. 1 Crore to Rs. 10 Crore and turnover between Rs. 5 Crore – Rs. 50 Crore will be categorized as Small enterprises.
[c] Medium enterprises will be defined on the basis of Investment in plant & machinery between Rs. 10 Crore to Rs. 20 Crore and turnover between Rs. 50 Crore – Rs. 100 Crore.
The revised criterion will ensure that even if MSME units grow in size, they continue to enjoy benefits accorded by the Government.
Table 1: Micro, Small, and Medium enterprises criteria – Old and New
5) Other measures:
Other measures include disallowing global tenders in government procurement up to a limit of Rs. 200 Crore so that foreign firms do not enjoy an unfair advantage over domestic MSMEs and promising the release of all pending dues to MSMEs from central PSUs within 45 days.
Though measures worth Rs.3,70,000 Crore have been announced for the MSME sector, the actual fiscal impact is just Rs.14,000 Crore, as the rest comes by way of guarantees or liquidity support.
Table 2: Actual fiscal impact
| Measure | Announced package (Rs.Crore) | Actual fiscal impact (Rs.Crore) | Reason | |
|---|---|---|---|---|
| 1) | Collateral free loans to MSMEs | 3,00,000 | 0 | Only a guarantee in case of default |
| 2) | Subordinated debt facility | 20,000 | 4,000 | From Rs.20,000 Crore, Rs.4,000 Crore direct to CGTMSE. Rest equity support |
| 3) | Equity infusion in MSMEs | 50,000 | 10,000 | Rs.10,000 Crore corpus for Fund of Fund created |
| Total | 3,70,000 | 14,000 |
DISCUSSION QUESTIONS
1) Discuss why the Government has accorded significant thrust on the MSME sector as part of Tranche 1.
2) An MSME unit with a turnover of Rs.150 Crore, approached its bank for a loan under the collateral free loan scheme announced by the Government of India. Will the MSME unit be eligible? (Hint. 1)
3) Discuss the structure of the collateral free loan package announced by the Finance Minister.
4) A fund of funds to provide equity support to MSMEs will enable them to get funding from lenders at attractive rates. Explain
5) After the FM ‘s five tranche package, a bank gave Rs. 50 Crore to an MSME unit and categorized it under micro enterprise. Is this a correct classification? Discuss (Table 1)
6) ABC Enterprise, an MSME unit, approached it’s banker for a collateral free loan facility of Rs.100 Crore for a tenure of four years on November 10, 2020. What will it’s banker do?
7) Though the announced size of the MSME package is Rs.3,70,000 Crore, the direct fiscal impact is only Rs.14,000 Crore. Is this package a stimulant? Discuss.
REFERENCES
- Finance Minister’s presentation
- financialexpress.com
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MSME are likely ot have more labor intense actviities, as they may not have automated their operations. With COVID around, and labor nto able to come for works, neither material movement being in place, one can see the benefits only after slow lockdown releases, I guess.