Govt. to Provide Collateral-Free Automatic Loans for MSMEs – A Brief Analysis

You don’t have to be an economic expert to observe and analyse the impact of COVID-19 on world economy. However, India is one of the few, or should we say, the only country (as of now) whose economy was somehow saved by its small businesses and enterprises. On the other hand, the corporate has also witnessed major shortcomings in terms of layoffs, an all-time low company registration rate (55% drop since January 2020), and new project announcement rates (312% drop).

As unlock 1.0 came into effect, both small and large corporations were expecting some relief in taxes or loan waivers from the government, but the government’s response was somehow surprising and relieving for the most part. Here is a brief analysis on the usefulness of the loan scheme.

Collateral-Free Loan – What’s In It?

The overall MSME loan worth Rs. 3 lakh crore is one of the few important measures taken for reviving the economy. Enterprises that have an average revenue of Rs. 100 crore or a maximum outstanding loan amount of Rs. 25 crore are eligible for this scheme. The loan comes with a tenure of 4 years and with a moratorium of 4 months. The best part is that both the businesses and the banks do not have to worry about the guarantee as the government has already got that covered in full. 

The 100% guarantee (without guarantee fee and/or fresh collateral) provided by the government covers the principal and interest amount, and interested businesses can apply for it till 31st October, 2020. This deadline may seem a bit short, but the businesses running low on cash flow understand the need of the hour. The scheme is expected to benefit approximately 45 lakh affected businesses.

The additional benefits of the scheme do not end here as the government will also facilitate a provision of Rs. 20,000 crore as subordinate debt as an equity support for troubled MSMEs. This subordinate debt is designated for MSME promoters who will infuse it to the equity of the MSME unit. Approximately 2 lakh troubled MSMEs are expected to benefit by the subordinate debt. 

On the other hand, there is also a provision for another Rs. 50,000 crore equity infusion through Fund of Funds. The objective of this corpus is to help MSMEs expand in both size and their capabilities. The government will also support SIDBI with a fund of Rs 4,000 crore through Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE, managed by SIDBI itself) that’ll in turn provide credit guarantee support to banks.

Collateral-Free Loan – How It’ll Help?

This collateral and government-backed guarantee loan scheme certainly sounds good, but there are a few things that promoters and enterprise owners should know beforehand as the government has also changed the definition of MSMEs which is the determining factor as per the MSME Development Act, 2006. Take a look at the chart below:

As you can see that the government has flipped the parameters earlier used for defining a micro, small or medium-sized enterprise, which will accordingly affect the market economy. In criticism of these revised parameters (that are yet to receive a nod from the parliament), the loan might’ve had a greater impact on the economy if suited to the earlier, unaltered parameters. However, the policy related to the collection of interest is quite relaxed as the banks will start collecting the interest from the 2nd year. The 1st year’s interest will be accumulated and spread over the entire tenure.

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