Measures to Save MSMEs to Fight COVID19 Slowdown
Honourable PM Narendra Modi announced the comprehensive economy package of Rs. 20 lakh crores on 12th May 2020 focusing on four factors of productions such as Land, Labour, Liquidity and Law. FM Nirmala Sitharam an has been announcing several measures to uplift the falling Indian economy with a motto of self-reliant India “Atam Nirbhar Bharat”.
A New Definition of MSMEs
The government focuses on increasing liquidity by promoting local businesses. Post COVID19, businesses suffer from the demand-supply gap, liquidity crunch and financial burdens from the government. The different parts of businesses covered through this economic package. There are several measures taken and in all 15 different measures have been announced on 15 May 2020. This article covers the 6 steps taken for the revival of small, medium and large-scale enterprises, MSMEs.
The government has introduced a new definition of MSME. The businesses were unclear about the category of the enterprise, which makes it difficult to get benefits.
A long wait of amendment in THE MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006 of classification of Micro, Small, Medium and Large scale enterprises ends.
The new classifications of Small, Medium and Large enterprises introduced, which is same for both the manufacturing and service sector units. The investment limit and business turnover are the two aspects considered for the classifications.
Earlier, MSME classification criteria was based on Investment in Plant & Machinery or Equipment. It is revised now and is based on two factors namely, Investment and Annual Turnover of the enterprise.
As per the Annual Report issued for the year 2018-2019 by Ministry of Micro, Small and Medium Enterprises, there are 6.33 crores MSMEs in India (including rural and urban), who are going to benefit under the scheme. The contribution of MSMEs is nearby 30% of countries GDP.
Here are the key takeaway points for MSME introduced by FM to boost the growth.
Collateral-Free Automatic Loan for SME's
The business liquidity should keep floating into the economy, small & medium scale enterprises suffer a lot due to COVID 19 crises. It is estimated that Collateral-free automatic loans will help 45 lakhs small & medium scale enterprises to boost their business and function effectively.
Under this scheme, the government has allocated Rs. 3 lakh crore collateral-free automatic loan. It means no SME’s under this scheme has to pay collateral or guarantee against the loan. The loans will be provided by Banks and NBFCs. The scheme guidelines are yet to be announced however the key takeaways are as follows:
- Which is the eligible enterprise – it is the MSME which has borrowing of not more than 25 Lacs and turnover of up to 100 crores. Only these SMEs are eligible. Therefore, the startups and other businesses which are small and do not fulfill these criteria, does not get covered here.
- How to take loans under the collateral free automatic route – since it is automatic route it is likely that your current lending bank or NBFC should proceed to lend under this scheme. Nonetheless it is better to approach your current lenders and ask them for the details and paper work required.
- What is Eligible amount of loan – The amount that an MSMEs is eligible to get a loan for has been announced. So, it up to 20% of the entire outstanding credit on 29 feb 2020. Hence, for instance, if total borrowings outstanding as on 29 feb 2020 is let’s say 10 crores for the entity, then it can avail loan up to 2 crores under this scheme.
- Tenor of such loans – it shall for a period of 4 years. It is also provided that for initial 12 months there will be a moratorium for principal. Moratorium means delay or suspension of an activity which is payment of EMI. It means that for a period of 12 months principal need not be paid but the interest will be paid as moratorium has been provided for principal payment only.
- Rate of Interest – interest rate will be capped.
- Period of this scheme – can be availed only up to 31 oct 2020.
- Guarantee or collateral – this is main benefit of this scheme that it will be collateral free and security or guarantee will be required to be furnished therefore.
Government is aiming for liquidity circulation though this measure and ensuring that once the businesses are back in action, they have sufficient funds to function at their full pace.
20000 Crores for NPA and Stressed MSME's
Availability of bank credit without the hassles of collaterals / third party guarantees would be a major source of support to the first-generation entrepreneurs to realize their dream of setting up a unit of their own Micro and Small Enterprise (MSE). Keeping this objective in view, Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched Credit Guarantee Scheme (CGS) in 2000, so as to strengthen credit delivery system and facilitate flow of credit to the MSE sector. To operationalize the scheme, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
As a way of next measure, government has announced on Wednesday, that it will provide support to CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) of Rs. 4000 crore, who will provide the partial credit guarantee support to the banks. The banks can then lend to promoters of MSMEs, who can infuse these funds as equity in the unit.
50000 Crores Equity infusion to MSMEs through fund of funds
Government has planned to infuse the MSMEs with Rs. 50,000 Crores equity through fund of funds. It will expand the size of MSMEs and help them listed on the main board of stock exchange.
The purpose of equity infusion through fund of funds will bring the growth of MSMEs and increase the viability for further expansion. The fund of funds includes the equity infusion into the Venture Capital and Private Equity firms, who invest in MSME startups. It means MSMEs financially supported by VC and PE firms can benefit more equity infusion to enhance the capacity. The proposed package helps them to increase their business capacity and helps them to list on the stock market.
Global Tenders up to 200 Crores Disallowed
The government announced that any global tenders up to Rs. 200 crores worth will be disallowed. This would mean that local businesses and MSMEs would have more opportunity to apply for such tenders up to 200 crores as global tenders are discouraged now.
The economic slowdown in the country brings the slowdown in MSMEs growth. To boost up the demand and supply for this segment of MSMEs, government announced this package.
It will increase the demand for local MSMEs for tenders up to Rs. 200 crores. As per Nirmala Sitharaman, this is the essential measures for creating self-reliant India. There are necessary amendments that will take place into General Financial Rules to take part in tenders up to 200 crores by MSMEs.
The E-Linkage Market for MSMEs
The major problem in the present time is marketing and liquidity in MSMEs. Due to Social-Distancing norms, physical activities such as trade fairs and exhibitions are unlikely to occur to market MSMEs. To address this problem, the government announced the E-Linkage in replacement of trade fairs and exhibitions.
The financial technology will enhance the transaction-based lending using data gathered by e-marketplace.
The MSMEs receivables from the government to be released in 45 days to increase the liquidity.
The government’s plan of actions for the survival of MSMEs welcomed by the nation. A mission of making India self-reliant increase the local business activities.